WASHINGTON – The U.S. economy likely gained more momentum in the spring than the government previously estimated. The question now is whether shrunken global stock markets and a sharp slowdown in China will weaken the economy in coming months.
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The Commerce Department on Thursday will update its estimate of the economy's growth, as measured by the gross domestic product, for the April-June quarter.
A month ago, the government calculated that the economy grew at a 2.3 percent annual rate last quarter. That figure marked a rebound from the January-March quarter, when growth slowed to an anemic 0.6 percent rate, mainly because of a severe winter and other temporary factors.
Economists surveyed by data firm FactSet have forecast that the government will now estimate that the economy expanded at a stronger 3 percent annual rate last quarter.
About half the increased growth is expected to have come from greater stockpiling of supplies than the government had initially estimated. But that buildup of inventory is expected to mean slower growth in the current July-September quarter. Analysts had originally expected annualized growth in the second half of the year to top 3 percent. Now, many think growth this summer reached a slower annual rate of around 2.8 percent.
Mark Zandi, chief economist at Moody's Analytics, has predicted that after a quarter of working down unwanted inventories, the economy will accelerate to a 3.5 percent annual rate in the October-December period. But that forecast is based on the expectation that the stock market's slide will stabilize before it damages consumer and business confidence.
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"My forecast rests on the assumption that this is a garden variety market correction, with stock prices dropping by 10 percent from their recent high," Zandi said. "If we get a bigger decline of 20 percent, then that will hurt consumption and housing, and we will not get the job growth we are expecting."
A decline in stock prices of 10 percent is generally considered a market correction, while a fall of 20 percent is viewed as the start of a bear market.
On Wednesday, stocks rallied to recoup some of the huge losses incurred in the previous sessions. The Dow Jones industrial average jumped 619 points, its biggest one-day gain in seven years. That snapped a six-day losing streak in which the Dow tumbled about 1,900 points, a plunge that wiped out more than $2 trillion in corporate value.
Analysts cautioned that there could be more turbulence ahead, in part because of unsettled conditions in China. Beijing has devalued its currency and taken other steps to address a major slowdown in its economy, the world's second-largest.
Wall Street took some comfort Wednesday from comments by William Dudley, president of the New York Federal Reserve Bank. Dudley told reporters that the case for a Fed rate hike in September is "less compelling to me than it was a few weeks ago," given China's troubles, falling oil prices and weakness in emerging markets.
Before the recent turmoil, many economists had thought that signs of an improving U.S. economy would lead the Fed to begin raising its key short-term rate, which it's kept at a record low near zero since late 2008. Now, many think the Fed will postpone its first rate hike until December or perhaps even later.