The economy grew at a healthy clip in the third quarter despite a heavy weight from housing, but the strong consumer spending and export performance that held it aloft now look set to fade.
Economists expect that over the next few quarters the economy will grow at a pace less than half the surprisingly strong 3.9 percent annual rate in the July-September quarter.
The economy grew solidly in the spring and the summer but that strong spell may be history, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.
Already, fresh signs of weakness have emerged. A report on Thursday from the Institute for Supply Management showed factory activity practically came to a halt in October, a sign tighter credit conditions and the housing downturn are now taking a toll on a broader swath of the economy.
While the Federal Reserve opted to cut interest rates a quarter-percentage point on Wednesday on top of a half-point reduction made in September, those moves have done little to brighten the dreary outlook.
Many forecasters expect the economy to grow only in the 1 percent range in the fourth quarter, and well under 2 percent during the first half of next year.
Much of the strength in the economy during third quarter reflected a surge in exports -- the largest since the last quarter of 2003 -- as the foreign appetite for U.S. goods jumped against the backdrop of a weaker dollar.
But still, net exports contributed less to the gain in third-quarter GDP than they had in the prior quarter, and their positive impact will likely continue to diminish as the health of the global economy deteriorates.
I don't think the kind of 14 to 15 percent growth in exports is maintainable, said Naroff.
The International Monetary Fund in its latest forecast points to a slowing in the euro area, which accounts for about 30 percent of demand for U.S. exports.
Growth in the region is expected to slow to 2.1 percent next year from an expected 2.5 percent this year as credit conditions tighten globally.
Softer demand for U.S. goods overseas would put the onus on consumers to prop up the economy.
CONSUMER SPENDING GROWTH
Growth in consumer spending, which accounts for about 70 percent of economic activity, more than doubled in the third quarter, reaching a 3 percent annual rate after a 1.4 percent second-quarter gain and contributing 2.1 percentage points to GDP growth.
Economists, however, say that pace of spending will be short-lived. They expect consumers to tighten their purse strings as they face bigger mortgage payments, declining home values and -- with oil prices nearing $100 a barrel -- the likelihood of higher costs to fill their gasoline tanks and heat their homes.
Everything that they buy is up ... adjustable rate mortgages are going way up, gas to get to and from work and food, said John Challenger, who heads up the Chicago-based job outplacement consulting firm Challenger, Gray and Christmas.
In addition, the job market is expected to weaken, which would put a further crimp on spending.
The strongest area of the economy was the exports sector. When we sell things overseas it doesn't necessarily have the same boost to domestic employment, said Carl Tannenbaum, chief economists for LaSalle Bank ABN Amro in Chicago.