Revision Expected to Lower GDP

The Commerce Department will report revised data for third-quarter gross domestic product on Tuesday.

Third-quarter growth likely will be revised down to 2.8% from the 3.5% reported on Oct. 29. The economy contracted 0.7% in the second quarter.

The downward revision for the third quarter is expected to reflect a smaller contribution from inventory investments and a larger trade deficit.

Inventory investment contributed nine-tenths of a percentage point to the 3.5% preliminary third-quarter growth estimate. This did not reflect inventory buildup but rather a slower pace of inventory liquidation -- firms downsizing for leaner consumer demand going forward. In the arcane world of GDP accounting, a slower liquidation of inventories counts as growth.

Other notable contributors to the 3.5% preliminary estimate were a one percentage point contribution from "cash for clunkers" and a one-half percentage point attributable to the first-time homebuyers' tax credit.

The increase in the trade deficit subtracted about one-half of a percentage point from growth.

The consensus forecast for fourth-quarter growth is 2.9%, and this may be optimistic.

Inventory investment may contribute less to growth, and the trade deficit will continue to swell, taxing demand for U.S.-made products and GDP growth. Cash for clunkers will not assist auto sales, and non-auto retail sales are recovering only modestly from the recession. Although the tax credit for new-home buyers has been extended and expanded, preliminary data do not indicate another sharp increase in residential construction activity.