Overall growth in the U.S. economy increased at an annual rate of 4% in the third quarter, trumping an advance estimate of 3.1%.

Bank of Montreal says that business inventories were the biggest factor behind the upward revision. This component now adds 0.5 percentage points to growth rather than subtracting 0.1 percentage points as had been originally estimated.

RBC Financial Group economists confirm that a “much stronger inventory build and better trade balance contributed most to the upside revision. Support also came from more modest upward revisions in residential investment and government spending while non-residential structures investment provided the bulk of downward revisions.”

“Some of the strength in third quarter GDP, particularly in consumer spending, was likely borrowed from subsequent quarters,” cautions BMO. “This is expected to contribute to some slowing in growth in the current quarter. In fact, the slightly greater build in Q3 inventories has prompted us to revise down Q4 growth to around 1.5% from a previous estimate of 1.8%. However, we feel that monetary policy remains sufficiently stimulative that growth will rebound to around 3% in the first quarter of 2003.”

While the revisions to third quarter GDP were largely anticipated, RBC notes that the revised GDP report offers the first comprehensive progress report on the profitability of the business sector since the second quarter. “The news was generally good. Before tax corporate profits rose 6.6% on an annualized basis following increases of 30% in the first quarter and 12.1% in the second quarter. Profits are clawing their way back from recessionary lows and in the third quarter moved above year-ago levels for the first time in two years,” says BMO. “The declining quarter-over-quarter trend may seem alarming but should be viewed as a normalization of profit growth around a more reasonable long-term trend rate of growth.”

“U.S. economic growth was more robust during the third quarter than was previously anticipated, and U.S. firms’ efforts to return to profitability are paying off,” offers BMO Nesbitt Burns.

“Such an environment will likely keep the Fed on the sidelines near term, though it is expected to start tightening policy by the summer of next year,” predicts Nesbitt.

http://www.bea.gov/bea/newsrel/gdpnewsrelease.htm