By Timothy R. Homan Dec. 22 (Bloomberg) -- The economy in the U.S. expanded in the third quarter at a slower pace than anticipated as companies curbed spending and cut inventories at an even faster pace, reductions that have set the stage for an acceleration in growth. The 2.2 percent increase in gross domestic product from July through September compares with a 2.8 percent gain previously reported by the Commerce Department in Washington. Improved consumer spending combined with a record drop in stockpiles this year will promote increases in production that may keep the world’s largest economy growing well into 2010. At the same time, companies such as Dell Inc. point to gains in business investment that signal growing confidence the expansion will be sustained. “All signals point to a strong fourth quarter,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “Growth is shaping up at around 4 percent as the inventory cycle turns upward.” The projected pace of growth was based on the median estimate of 73 economists in a Bloomberg News survey. Estimates ranged from gains of 2.5 percent to 3.7 percent. The GDP report is the third and final for the quarter. The government’s advance estimate two months ago was 3.5 percent. The economy shrank 3.8 percent in the 12 months to June, the worst performance in seven decades. The four consecutive decreases through the second quarter mark the longest stretch of declines since quarterly records began in 1947. Higher Profits This month’s revisions also showed a bigger gain in earnings than first estimated. Third-quarter corporate profits increased 10.8 percent rather than 10.6 percent, marking the biggest gain in more than five years. Productivity gains have boosted company earnings as payrolls are reduced. Labor costs fell at a 2.5 percent rate last quarter, capping the biggest 12-month drop in seven years, Labor Department figures showed earlier this month. Productivity, a measure of employee output per hour, surged at an 8.1 percent pace percent in the third quarter, the fastest pace in six years. The economy has lost 7.2 million jobs since the recession began in December 2007. Payroll cuts peaked at 741,000 in January before receding to 11,000 in November. The unemployment rate last month fell to 10 percent, from a 26-year high of 10.2 percent in October. Economists surveyed by Bloomberg this month forecast the jobless rate will remain above 10 percent through the first half of next year. Fed Concern The elevated jobless rate is one reason Federal Reserve policy makers said last week they would keep their benchmark interest rate low for an “extended period.” Another reason was that prices aren’t accelerating. The Fed’s preferred inflation gauge, increased less than forecast. The measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.2 percent annual pace following a 2 percent increase in the prior quarter. Consumer spending, which accounts for about 70 percent of the economy, rose at a 2.8 percent pace last quarter, compared with the 2.9 percent rate forecast by economists and a 0.9 percent decline the previous three months. Spending added 2 percentage points to third-quarter growth. Retailers such as Best Buy Co. are using discounts to boost holiday sales. A report tomorrow is projected to show household purchases rose 0.7 percent for a second month in November. Today’s report showed business fixed investment dropped at a 1.3 percent pace last quarter compared with a previously estimated 0.3 percent increase. Purchases of equipment and software increased at a 1.5 percent pace, less than the Commerce Department estimated last month. The drop in commercial construction was larger than estimated last month. ‘More Optimistic’ “Overall commercial spending is looking better than what we had hoped for,” Steve Felice, president of Round Rock, Texas- based Dell’s small- and medium-business division, said yesterday in a Bloomberg Television interview. “We’re coming into this holiday season much more optimistic than a year ago.” Inventories dropped at a $139.2 billion annual pace, more than previously estimated. The decrease was smaller than the record $160.2 billion decline in the second quarter, adding 0.7 percentage point to growth. Residential construction jumped at an 18.9 percent pace last quarter, the most in six year and adding 0.4 percentage point to growth. Recent reports indicate the housing slump, which helped trigger the financial crisis, is showing signs of continued improvement. Home sales have been supported in part by tax credits for homebuyers and Fed purchases of mortgage-backed securities that have helped lower borrowing costs. The economy will likely expand at a 3 percent annual rate from October through December, the median forecast in a survey earlier this month showed. Since then, economists at Credit Suisse and JPMorgan Chase & Co. in New York have boosted their projections from 3.5 percent to 4.5 percent as inventories began to grow in October and exports rose. Trade subtracted 0.8 percentage point from third-quarter GDP. The gap between exports and imports climbed to $357.4 billion at an annual pace from $330.4 billion. To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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