U.S Economy Continues to Build Momentum 12/20/13

The U.S. economy expanded at the fastest pace since the final three months of 2011.  The Commerce Department released figures showing that the U.S. gross domestic product (GDP) expanded at 4.1% in the third quarter of 2013, exceeding almost all analyst estimates.  The median estimate of 72 economists surveyed by Bloomberg projected a 3.6% pace after 2.5% in the second quarter.

Inventory building helped account for the better than expected results in the 3rd quarter as stockpiles added 1.67% to GDP.  Although the pace of inventory building will most likely cool in the 4th quarter, economist are much more optimistic and many project the economy to grow at around 2% in the final three months of the year.

Business confidence is showing signs of improvement as corporate spending rose 0.2%, compared with a previous reading of no change.  Business investment in intellectual property was revised up to a 5.8% increase, reflecting more spending on software.  Further business investment will depend on how much confidence CEOs have that the economy will maintain positive growth trends.

Consumer spending, which accounts for almost 70% of the economy, increased 2%, which was higher than initially estimated and suggests that consumers are more optimistic about future economic conditions.

Higher equity markets are supporting household net worth and rising home values are making consumers feel wealthier and therefore allowing them to open their pocket books and consume.  This is a very good sign for momentum going into 2014.

The report released by the Commerce department this morning also showed that corporate profits in the U.S. rose at a 1.9% rate after climbing at a 3.3% pace in the prior period.  CEOs will need to focus on top line sales growth going forward as most companies have exhausted almost all cost-cutting avenues available.  This should support stronger employment, M&A activity and capital expenditures in 2014.

The labor market continues to improve as unemployment fell to a 5-year low of 7% in November.  The Federal Reserve sighted this improvement as the catalyst for reducing their monthly bond purchases by $10 billion to $75 billion per month.

Many economists are predicting that the Federal Reserve will continue to reduce their monthly bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014.  The Federal Open Market Committee said it will slow buying “in further measured steps a future meetings” if the economy continues to improve as forecast.

 

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