GDP Surprise: Big Jump Expected for 3Q
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The Fiscal Times
October 26, 2011

How’s this for an October surprise? After a volatile few months that saw Standard & Poor’s downgrade the U.S. credit rating, consumer confidence plunge, and Armageddon—or at least a double-dip recession — seemingly just over the horizon, the economic outlook, while still clouded by many concerns, has actually brightened a bit.

Economists surveyed by various outlets have, over the last month, raised their forecasts for third-quarter GDP growth to 2.5 percent, up from much less rosy rates below 2 percent. Corporate earnings overall have come in better than expected—not unusual, but still a relief given fears that the stalling economy could grind away at profits. The stock market has responded with gusto. Even after Tuesday’s losses, the Dow Jones Industrial Average was still up 9.9 percent since hitting its low for the year on October 3. After falling for five straight months, the Standard & Poor’s 500-stock index is up 8.6 percent in October, its best monthly gain since September 2010.

“Forecasters got too pessimistic over the last two months, and the data recently have gotten better,” says Joseph Lavorgna, chief U.S. economist at Deutsche Bank.

Clearly, the economy is not yet healthy—and, for most Americans, it certainly doesn’t feel like things are getting any better. Consumer confidence this month plummeted to recession levels, according to survey results released Tuesday by The Conference Board. Unemployment remains at a stubborn 9.1 percent. Europe still has a massive looming debt crisis to deal with. And initial third-quarter GDP numbers due out on Thursday could prove those suddenly more optimistic economists to be Pollyannas.

Still, that median forecast of 2.5 percent GDP growth, if borne out by Thursday’s data, would be a significant jump from the 1.3 percent growth the U.S. experienced in the second quarter of the year and the 0.4 percent increase of the first quarter.

But even 2.5 percent growth isn’t enough to jumpstart the job market. More troubling, many of the same economists who have upped their forecasts for the third quarter are predicting that it will be a short-lived bump, with growth slumping again at the end of the year and into 2012.

“The real question you have is will this rebound in activity that we’re going to see in the third quarter be sustained,” says Michael Carey, chief economist for North America at Credit Agricole. “There, the jury is still out.” Chances of another recession, even optimistic economists say, remain higher than they were three months ago, with risks both at home and abroad.

The growth picture for the fourth quarter and beyond will be determined in large part by consumers, of course, who account for 70 percent of GDP. Economists will be looking at Thursday’s GDP data for signs of sustainable growth — specifically, increasing demand rather than growing inventories on shelves. Economists will also be watching the auto market to see if a third-quarter rebound in sales continues or was just the result of pent-up demand following supply disruptions caused by the Japanese earthquake and tsunami in March. If the dramatic worsening in consumer sentiment leads to a similar reduction in spending, economists could find themselves revisiting their more dire forecasts of this summer.

“We are concerned with the pace of consumer spending slowing again,” says Carey, who is forecasting 2.5 percent GDP growth in the third quarter but just 1.8 percent growth in the fourth quarter. “While we don’t expect it to fall off a cliff, going into the very important holiday buying period, people may be a bit more restrained just given the uncertainty facing them. And, of course, the job market continues to be relatively weak.”

In a quarterly survey of
corporate economists,
just 29 percent expected
employment to increase
in the next six months.


Businesses are being cautious, offering little indication that the job market will rebound strongly anytime soon. A quarterly survey of 70 corporate economists by the National Association for Business Economics reflects that overall caution. The survey, released Monday, found that 49 percent of respondents reported rising sales in the third quarter, compared with 13 percent reporting declining sales. Despite that relative strength, expectations for GDP growth this year fell sharply, with 84 percent expecting the overall economy to expand by 2 percent or less, up from 23 percent in July forecasting such moderate growth. Those lowered expectations led businesses to curtail hiring plans, with just 29 percent of survey participants saying they expect to increase employment in the next six months, down from 43 percent in July and the worst reading since January 2010.

The political stalemate in Washington as the Obama administration and Congress battle over the president’s proposed $447 billion job bill could also lead to worsening growth forecasts, economists warn. A failure to extend emergency unemployment benefits or the temporary payroll tax cut could add fiscal drag. And the economy and the stock market could also face another hit if the joint congressional Super Committee on deficit reduction fails to come up with at least $1.2 trillion in spending cuts and tax increases by its November 23 deadline.

Without an agreement, a Bank of America economist warned Friday, the U.S. is likely to see its credit downgraded by Moody’s Investors Service or Fitch, which for now at least have stuck with AAA ratings on federal debt, though Moody’s has a negative outlook on its rating. “We expect at least one credit downgrade in late November or early December when the Super Committee crashes,” Ethan Harris of BofA Merrill Lynch wrote. But after having been through a downgrade recently, Harris said, the jolt to economic confidence and the stock markets from another one would be less severe.

On top of those domestic issues, of course, European debt concerns still loom as a threat to U.S. banks and the economy more broadly. “The issue at this point,” says economist Chris Christopher of IHS Global Insight, “is what is the fallout from the European debt issues—what exactly happens and how does it actually play out?”

So while the U.S. recovery looks somewhat better than it did even a few weeks ago, the outlook can still change quickly. Again.

Executive Editor Yuval Rosenberg oversees coverage of business, the economy, technology and Wall Street. A former web editor at WNYC, Fortune and Newsweek, he also writes on a wide range of subjects.