Q3 GDP Preview: Economy Seen Expanding 1.9% On Stronger Consumer Spending, Housing

 @moranzhang
on October 25 2012 6:45 AM
US Economy
Unconventional times require unconventional measures, and with the U.S. economic expansion growing at a truly tepid rate, perhaps it's time to try an innovative fiscal stimulus proposal recommended by an economist about three years ago. REUTERS

The U.S. economy probably expanded at a slightly faster pace in the third quarter compared with the previous quarter, supported by solid consumer spending and a recovery in housing that has gained steam in recent months.

But some economists warn that while there is some tentative evidence that certain sectors of the economy have recently turned a corner, it is hard to foresee a significant and sustained acceleration in overall gross domestic product growth without a definite resolution to the euro zone crisis and America’s domestic fiscal problems.

GDP, the value of all goods and services the nation produced, rose at a 1.9 percent annual rate after a 1.3 percent gain in the previous quarter, according to the median forecast of 84 economists surveyed by Thomson Reuters. That’s still short of the 2.5 percent to 3 percent pace economists say is needed to bring down unemployment.

The Commerce Dept. will release the GDP report at 8:30 a.m. EDT on Friday, just 11 days before the presidential election.

Consumer spending, which accounts for 71 percent of GDP, is expected to have grown at a rate of at least 2 percent in the July-September period, after increasing at a 1.5 percent pace in the second quarter. Meanwhile, a surge in housing starts points to a significant positive contribution from residential investment.

“One of our main messages about the U.S. is that growth may be slow, but it is not fragile,” Dean Maki, chief U.S. economist at Barclays, wrote in a note to clients. “We view overhang from the crisis, downside risk from the European debt crisis, and uncertainty about U.S. fiscal and monetary policy as factors that attenuate hiring and investment spending, but that are unlikely to create a recession.”

Consumer Spending

Retail sales rose a solid 1.1 percent month-on-month in September, and strength was fairly broad-based. August’s data was also revised higher to show a 1.2 percent increase instead of the originally reported 0.9 percent gain.

More importantly, the “core” measure of sales (which excludes gasoline, autos and building materials and feeds directly into economists’ GDP tracking models), increased a robust 0.9 percent in September. On a three-month average annualized basis, core retail sales are up 4.4 percent, reflecting a notable pickup since the summer.

And September’s better-than-expected retail sales report isn’t all about Apple.

Admittedly, some of the rise in sales in September was due to the release of the Apple iPhone 5, which will then subtract from growth in the coming months. Retail sales of electronics fell in the months after the release of both the iPhone 4 and the iPhone 4s. But the 4.5 percent monthly rise in electronics sales in September added just 0.1 percentage points to overall retail sales, according to Paul Dales, senior U.S. economist at Capital Economics.

While recent data have been better, economists are reluctant to give an all-clear sign, citing the dreaded "fiscal cliff."

“Unless the fiscal cliff is avoided, consumers face a large tax increase at the end of the year. As we approach the cliff, we are concerned that consumer spending will slow as consumers react to the uncertainty shock, delaying big-ticket purchases because of the uncertain tax and economic outlook at the start of the New Year,” Joshua Dennerlein, U.S. economist for Bank of America Corp. in New York, said in a note.

Housing Recovery

There are signs that activity has started to improve outside of the consumer sector.

Societe Generale Senior U.S. Economist Brian Jones expects residential investment to add a little over one-quarter percentage point to third-quarter real GDP growth. However, Jones added that even if his projection is on the mark, residential investment would account for just 2.75 percent of real GDP, well below the recent peak share of 6.2 percent recorded in the summer of 2005.

Residential investment has now contributed positively to real GDP growth in five consecutive quarters, a trend that is expected to continue.

The surge in housing starts to a four-year high in September suggests that the residential real estate recovery is truly gathering pace. Compared with a year earlier, new construction was up by nearly 35 percent.

In another positive sign, sales of newly built homes in the U.S. rose in September to their highest level in more than two years. Meanwhile, home prices rose for the seventh straight month in August, up 0.7 percent on a seasonally adjusted basis from a month earlier, according to the Federal Housing Finance Agency's monthly home-price index.

Inventories A Wild Card

Jones had assumed that a farm-led reduction in private inventories attributable to the summer’s severe drought would pare 0.4 percentage points off GDP growth. “While we continue to believe that reduced inventories of agricultural products will produce a significant drag, available data through August point to a sharp pickup in stock-building by manufacturers, merchant wholesalers and retailers,” Jones said.

He now expects the change in private inventories to expand by $18.8 billion over the three months ended September to $60.2 billion, adding almost six ticks to the third-quarter GDP growth.

Capital Economics Chief U.S. Economist Paul Ashworth appears to be less optimistic. He is calling for a below-consensus third-quarter GDP growth rate of 1.3 percent, and he is concerned that growth could turn out to be even weaker because inventories may end up being an even bigger drag.

“We think it would be premature to conclude that the U.S. is about to embark on strong and sustained recovery,” Dales said. “The fact is that we have been here before and there are few reasons to believe that this improvement has longer legs than the ones that began in late 2010 and 2011.”

On both those occasions, the economy improved once Europe appeared to be getting its fiscal house in order and after the Fed provided more policy stimulus. But on both occasions, the European fix proved to be nothing more than a temporary Band-Aid and the Fed’s policies did not boost the real economy by as much as hoped, Dales said.

“Despite the favorable market response to the European Central Bank’s announcements, we would be very surprised if the euro-zone crisis did not flare up again,” Dales said. “And once November’s presidential election is out of the way, the focus of both Congress and the American public will turn towards the impending fiscal cliff. Faced with the prospect of a significant rise in taxes, households are unlikely to spend so freely.”

“The bottom line is that a sustained acceleration in GDP growth is unlikely,” Dales added.

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