GDP is revised higher, but large risks threaten outlook

WASHINGTON -- The government revised sharply higher its figures on the nation’s economic growth for the third quarter, saying that businesses exported and stockpiled more goods than previously thought. Corporate profits also strengthened in the quarter.

But consumer spending and business investments in the July-to-September period were softer than initially estimated. And the current fourth quarter overall is looking weaker, with the threat of higher taxes and government spending cuts -- the so-called fiscal cliff -- looming large for the future of the recovery.

The Commerce Department said Thursday that the nation’s gross domestic product -- the sum of all goods and services produced inside U.S. borders -- expanded at an annual rate of 2.7% in the third quarter, in part because of a pickup in government spending.

In its earlier “advance” estimate last month, officials said GDP grew at a more moderate 2% pace in the quarter.

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The upward adjustment was largely expected by analysts, though the downward revision in personal and business spending was a disappointment.

The report confirms that economic activity accelerated after a sluggish first half of the year when weather-related factors and concerns about Europe took a bite out of growth. GDP rose 2% in the first three months of the year and then growth tailed off to 1.3% in the second quarter.

More recently, there have been some encouraging economic signs, including rising consumer confidence, a recovering housing market and some improvement in the employment condition. Nonetheless, economists widely expect GDP growth to slow in the fourth quarter to closer to 2%, in part because a bigger buildup of inventory in one quarter tends to reduce production and stockpiling in the next. Also, there’s been restrained investment by businesses uncertain about future tax and spending policies.

The outlook beyond this quarter is muddled by the ongoing political debate over how to address the fiscal cliff. Most experts expect policymakers to break the impasse and avoid going over the cliff, which would trigger spending cuts and tax increases at the start of the year totaling more than $500 billion.

If the fiscal and tax problems can be resolved satisfactorily and the Eurozone’s debt crisis stabilizes, some analysts say the U.S. economy will likely expand at about a 2% pace next year and then accelerate in 2014. Other economists see considerably faster growth ahead should the fiscal cliff be averted and the European situation eases.

If the U.S. goes over the cliff, however, most experts say the nation will sharply reduce its deficit but also fall into at least a mild recession, resulting in higher unemployment and raising the risks of deeper economic and financial problems.

“With so many people out of work, and for a much longer stretch, a more virulent form of hysteresis would set in,” said economists at Moody’s Analytics.

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