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Good News Is Bad News for US Economy

December 5, 2013

Q3 expansion expected to lead to Q4 declines.

When is good news really bad news? When inventory buildup is followed by consumer apathy or worse, apprehension. The US economy expanded by a 3.6% annual pace in the third quarter to mark the fastest increase in a year and a half, but the revised gain was fueled by a huge buildup in inventories that’s likely to prove fleeting, according to analysts.

The spike in inventories was the largest since 1998, and such large increases are usually followed by slower inventory growth in the following quarter. Most economists expect a slowdown in the final three months of 2013 that would drag gross domestic product well below 2%.

Some retail analysts say companies failed to sell as many goods as they expected during the kickoff to the holiday season. If that’s the case, companies might have to cut prices to drum sales and accept lower profit margins. The 3.6% annualized growth rate is the fastest since the first quarter of 2012. Economists had expected gross domestic product to be revised up to 3.2% from an initial read of 2.8%.

The economy is projected to slow to a 1.6% rate in the fourth quarter, however, because of less warehouse stockpiling and the drag from the government shutdown in October.

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