Published October 26, 2012
WASHINGTON – U.S. economic growth likely picked up a bit in the third quarter as a last minute burst in consumer spending offset cutbacks in investment by cautious businesses.
The stronger pace of expansion, however, is still expected to fall short of what is needed to make much of a dent in unemployment, and will offer little cheer for the White House ahead of the closely contested November 6 presidential election.
Gross domestic product probably expanded at a 1.9 percent annual rate, according to a Reuters survey of economists, accelerating from the second quarter's 1.3 percent pace. A pace in excess of 2.5 percent would be needed over several quarters to make substantial headway cutting the jobless rate.
"Two percent growth is still significantly weaker than what would be necessary to make and sustain a successful transition to a more self-sustaining recovery," said Millan Mulraine, senior economist at TD Securities in New York.
The Commerce Department will release the third-quarter GDP report at 8:30 a.m. on Friday, a little more than a week before the election in which President Barack Obama is trying to fend off Republican challenger Mitt Romney.
Since climbing out of the 2007-09 recession, the economy faced a series of headwinds from high gasoline prices to the debt turmoil in Europe and, lately, fears of U.S. government austerity. It has struggled to exceed a 2 percent growth pace and remains about 4.5 million jobs short of where it stood when the downturn started.
Consumers appear, however, to have largely shrugged off the impending sharp cuts in government spending and higher taxes, which are due at the start of the year absent congressional action. Indeed, they went on a bit of a shopping spree as the quarter wound down, buying a range of goods -- including automobiles and Apple Inc's iPhone 5.
Consumer spending, which accounts for about 70 percent of U.S. economic activity, is expected to have grown at a rate of at least 2 percent in the third quarter after increasing at a 1.5 percent pace in the prior period.
CAUTIOUS ON SPENDING
High stock prices and firming house values have made households a bit more willing to take on new debt, supporting consumer spending. A mild increase in wages has also helped.
But with about 23 million Americans either out of work or underemployed, there are fears the current pace of spending will not be sustained, especially if gasoline prices maintain their recent upward march and families get a higher tax bill in 2013.
"We remain cautious on consumer spending as real disposable income growth remains weak and we could see some pullback over concerns on the fiscal cliff and potentially higher tax rates next year," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
The so-called fiscal cliff refers to automatic tax hikes and government spending cuts that will drain about $600 billion out of the economy next year absent congressional action.
Fiscal cliff fears have already hammered business spending, which is expected to have contracted in the third quarter for the first time since the first three months of 2011.
Much of the drag in business investment, which had been a source of strength for the economy, is expected to come from weak outlays on equipment and software.
Spending on nonresidential structures is also expected to have contracted after five straight quarters of growth.
In contrast, home building is expected to have posted double-digit growth, thanks in large part to the Federal Reserve's ultra accommodative monetary policy stance, which has driven mortgage rates to record lows.
Inventories could also be a source of growth in the third-quarter, but they are a bit of a wild card.
A drought in the country's Midwest has decimated grain and corn crops. In the second quarter, the drought reduced farm inventories. But nonfarm businesses might have been reluctant to add to much to their stocks given the uncertain domestic outlook.
Government spending is expected to have been a drag on growth for a ninth straight quarter.
In addition, slowing global demand, particularly weakness in Europe and China, probably undercut U.S. exports. That likely left a trade deficit that weighed on GDP growth.
(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Neil Stempleman)