Consumer spending seen helping quarterly growth

By @ibtimes on

The U.S. economy probably gathered speed in the fourth quarter, with the biggest gain in consumer spending in four years offering the clearest signal yet that a sustainable recovery is under way.

Even with growth quickening, however, progress reducing unemployment has been painfully slow, and the report on U.S. gross domestic product due on Friday will likely be little comfort for millions of unemployed Americans or the Federal Reserve officials on a jobs-creation vigil.

The economy grew at a solid 3.5 percent annual rate in the final three months of 2010, according to a Reuters survey, after expanding at a 2.6 percent pace in the third quarter.

The Commerce Department will release the advance GDP data at 8:30 a.m..

It will likely show that the recovery has accelerated, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Unfortunately we still need to see much stronger growth to begin to really make a dent in the unemployment rate. Right now we are just barely creating enough jobs to stabilize the unemployment rate.

On Wednesday, Fed officials voiced concern that the pace of the recovery was still not strong enough to significantly lower unemployment and reiterated a commitment to a $600 billion stimulus effort through the purchase of government bonds.

The jobless rate has been stuck above 9 percent since May 2009. With the economy's growth potential between 2.5 percent and 2.7 percent, analysts say an expansion rate of at least 3 percent over several quarters is needed to cope with new entrants into the labor market and those who have given up the search for work.

The unemployment rate fell to 9.4 percent in December from 9.8 percent in November.

CONSUMERS STEPPING UP TO THE PLATE

Details of the GDP report are expected to show the economy moving in the right direction. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have grown at a rate perhaps as high as 4 percent.

The handoff from temporary factors to domestic demand is under way. This is what we need for the recovery to be self-sustaining, said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Support to growth during the fourth quarter is also expected to have come from business spending on equipment and software, which should notch its seventh straight quarter of growth.

Although businesses have been hesitant to hire, they have used their vast cash reserves to buy new equipment and upgrade their technology. But the pace of investment in equipment and software probably slowed in the fourth quarter.

Government spending is expected to have made a modest contribution to growth.

Given that the government does not yet have trade and inventory data for December and will have to make estimates when it calculates the GDP number, there is a risk that figure could miss economists' expectations.

Economists expect the trade deficit narrowed in the fourth quarter, which could result in trade offering its first contribution to growth since the final three months of 2009.

That could offset an anticipated drag from business inventories as the pace of stock accumulation slows down.

Inventories, which have been the main driver of growth since the start of the recovery in the second half of 2009, could be a drag on GDP growth for the first time since the second quarter of 2009.

We expect the drag from inventories to be fairly significant, but that is going to be offset by a noticeable improvement of the trade deficit, said Sweet.

Weak investment in home building and nonresidential structures was expected to again subtract from growth in the fourth quarter. Home construction remains mired at depressed levels after a temporary boost from a government tax credit and the overall housing sector is lagging the economic recovery.

The advance GDP report is also expected to show a rise in the personal consumption expenditures price index, reflecting the recent surge in food and gasoline prices.

But the core PCE price index, which excludes food and energy costs, likely remained benign, highlighting the Fed's concerns about low underlying inflation.

(Reporting by Lucia Mutikani; Editing by Kenneth Barry)

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