After months of dire predictions for the economy, including warnings of a new recession, forecasters are singing a different tune.

Projections for an extremely weak third-quarter have been shredded and replaced with a fairly upbeat assessment of the quarter that just closed last month.

Economists say they put too much stock in the sharp decline in consumer confidence and the extreme turmoil in financial markets sparked when Standard & Poor's stripped the nation of its AAA credit rating in early August.

At that point, we based our forecasts on the fact that all the indicators were turning downwards, not knowing that was the trough, said Millan Mulraine, senior macro strategist at TD Securities in New York. We underestimated the pace of momentum that was building in the economy at the time.

Economists now estimate gross domestic product grew at an annual pace of 2.5 percent, according to the median of a Reuters poll. That would mark a sharp step up from the 1.3 percent logged in the second quarter and a far cry from what some feared just a few weeks ago.

The government releases its first estimate of third quarter growth on Thursday at 9:30 a.m. EDT.

While consumer confidence crumbled to levels last seen during the 2007-09 recession. and some business surveys pointed to a contraction in factory output, so-called hard data measuring actual activity continued to show modest growth.

Data from retail sales to factory orders to manufacturing output painted a portrait of households and businesses not shy to spend, despite feeling terrible about the economy.

We are looking at consumer confidence numbers which are as bad or worse than at the bottom of the recession when we were losing about 800,000 jobs a month, said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

That doesn't make much sense. Consumer confidence is a little bit overrated as an economic indicator. It's something that you have to pay attention to, but it's sometimes driven by things that don't make much difference to economic behavior.

TEMPORARY FACTORS LIFT GROWTH

Part of the anticipated pick up in third-quarter growth will mark a reversal of temporary factors that held back growth early in the year. A surge in gasoline prices had weighed on consumer spending and supply disruptions from Japan's earthquake had curbed auto production.

U.S. auto output has jumped as those supply constraints have eased. Auto production rose at an annual rate of 21.4 percent in the third quarter after contracting 15.8 percent in the second quarter, according to Federal Reserve data.

Further, car sales, which were held back by the lack of popular models, have also shown new vigor. In September, auto sales jumped 3.6 percent.

That strength is expected to drive overall consumer spending, which accounts for about 70 percent of economic activity, at a 2 percent pace or better. In the second quarter, it advanced just 0.7 percent, the smallest gain since the fourth quarter of 2009.

Data also indicate business spending on equipment and software quickened, despite the sharp sell-off on global stock markets.

Indeed, the view from the board room is not that bleak.

United Parcel Service on Tuesday affirmed its outlook for record 2011 results and Caterpillar on Monday forecast strong demand through next year.

THREATS LINGER

While some of the factors behind the expected third-quarter growth spurt could be perceived as temporary, economists believe the momentum will be sustained into the end of 2011.

However, they caution that Europe's debt crisis could derail the U.S. recovery if not dealt with decisively, as could a failure by Congress to keep in place economic supports.

A temporary payroll tax cut and emergency extension of unemployment benefits will expire at year end, absent congressional action. At the same time, Republican lawmakers have shown little appetite to move forward with other elements of President Barack Obama's $447 billion job creation plan.

Most people know what is needed, but they have different agendas, they are all playing chicken with each other, said John Hancock Financial Services' Cheney.

If they do end up with total gridlock where tax cuts expire and spending gets choked off, then the outlook would be quite a bit worse. (Reporting by Lucia Mutikani; Editing by Andrew Hay)

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