WASHINGTON — The third revision to U.S. Q3 GDP was shocking in its intensity a 0.5-point upward revision, a gain seen only a handful of times and when normally this far along in the estimating process any revision is less than half that — and better reconciles GDP data with faster payrolls growth at around 200,000 jobs a month. But the numbers still show massive inventory build-up that could prove a problem unless late Christmas sales surge. 

The Q3 GDP revision was to 4.1% growth, the fastest pace since Q4:2011. As history showed, though, 2011 gave way to slow and sometimes seesawing growth for six additional quarters. This suggests the current GDP reading might not be a signal of an economic surge.

The revision came on better consumer spending: services and gasoline & other energy spending were revised higher. Healthcare, recreation, and nonprofit spending also were revised up. These changes stemmed from the new services survey and Energy Information Administration data.

Nonresidential investment also was revised higher on software rights. In residential spending, real estate broker commissions and land transfer fees were revised lower.

GDP prices posted 2.0% growth , and core PCE prices rose 1.4%. These are still tame inflation readings.

Real final sales remained weaker than the headline, at a 2.5% increase. That is still their best pace since Q1:2012.

Inventories added massively to Q3 growth, suggesting Q4 could see an inventory-induced slowing unless demand jumps. So far, the October data suggest further inventory building in Q4.

But any inventory drawn down in Q4 will hurt growth unless spending gets a massive boost at the holidays.

Another reason to suspect that growth will not sustain a 4%-plus pace ahead is that real gross domestic income was estimated at less than half that, at 1.8% rise in Q3. That was an upward revision of 0.4 point but well below the growth rate. Over long time spans one would expect estimates of income and product to be highly correlated.

Corporate profits also were revised and now show a $39.2 billion gain from current production. A breakdown not previously available shows the bulk of the profits came in durables manufacturing away from autos.

A bottom line from this report is that although Q4 data are coming in strong, we must await final tallies on holiday inventories and sales before concluding the U.S. economy has moved to a higher plane.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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