The Incredible Shrinking Q3 GDP: A Sign for 2012?
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The Incredible Shrinking Q3 GDP: A Sign for 2012?

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The summer is but a distant memory at this point, but it somehow still keeps getting worse. The Commerce Department on Thursday revised its estimate of GDP growth for the months of July, August and September down to 1.8 percent. That’s lower than the 2.0 percent figure released last month and significantly lower than the advance reading of 2.5 percent growth issued in October.

The latest revision, which is based on more complete data than earlier releases, showed lower growth in consumer spending than previous estimates. Real personal consumption expenditures increased 1.7 percent compared to an earlier estimate of 2.3 percent. Lower spending on health care services was the main factor behind the change, but at the same time, spending on durable goods increased by 5.7 percent, showing that shoppers were still willing to loosen their purse strings. Business investment was stronger than originally reported, with companies increasing spending by 15.7 percent, and boosting spending on equipment and software by 16.2 percent.

Even with GDP growth below 2 percent, the third quarter continued a quickening of the economic expansion, which had been at a 0.4 percent annual rate in the first quarter of the year and 1.3 percent in the second quarter. But that 1.8 percent figure released this morning was automatically old news. “The third quarter data is, if not ancient history, it is history,” says Stuart Hoffman, chief economist for The PNC Financial Services Group. As we approach the final days of the year, Hoffman and other economists are more focused on the current quarter, where a deluge of recent data suggests signs of real strength, and on the year ahead, where many concerns remain and the outlook isn’t as bright.

For the fourth quarter, economists still expect GDP growth of more than 3 percent on average, the fastest growth since the second quarter of 2010. The housing market, while still depressed, has shown signs that a rebound might finally be taking hold. Small business owners surveyed by the National Federation of Independent Business, while not exactly merry about the economy, are increasingly optimistic.

Most importantly, perhaps, the job market, though still far from robust, has provided some reason for measured optimism. The unemployment rate fell from 9 percent to 8.6 percent last month. And the Labor Department on Thursday said that number of Americans filing new claims for unemployment benefits last week fell to 364,000, the lowest level since April 2008. The figure was better than the 380,00 new filings economists had expected – the third straight week that claims have fallen, and been significantly better than what economists were predicting. “This is great news,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in an email to clients. “One unexpectedly low number can easily be a fluke; two are interesting; three are telling us something real is happening in the labor market.”

The improvement in the job market has cheered consumers. The Thomson Reuters/University of Michigan consumer sentiment index for the end of December, released Thursday, climbed for the fourth straight month to reach 69.9, up from an August low of 55.7. “Gasoline prices have fallen, food prices are still increasing but at a much slower pace, the stock market bounced back, real income growth returned, and employment prospects seem mildly better,” notes economist Chris Christopher of IHS Global Insight.

Even as they project strong gains in the fourth quarter, economists are still much more tempered in their forecasts for 2012. Economists on average expect GDP growth of about 2.3 percent for the year, but even that modest growth projection depends to a large extent on the ongoing effects of Europe’s debt crisis. “This somewhat positive outlook for the domestic economy is at odds with a global economy that appears to be losing steam,” Conference Board economist Ken Goldstein said Thursday in a statement accompanying the release of another strong reading of leading economic indicators. “In particular, a deeper-than-expected recession in Europe could easily derail the outlook for the U.S. economy.”

Congress could muck things up too. The U.S. payroll tax holiday and extended unemployment benefits are both due to expire on January 1, and renewal of both has become entangled in partisan Congressional politics. “The economy is ending 2011 with some momentum and then how far that carries in part depends on whether the tax cut is extended or not,” says Hoffman, who adds that a failure to extend the payroll tax cut could slash consumer spending by $100 billion or more. “While that maybe is not completely make or break,” he says, “I think it is an important ingredient in what the economy does, particularly in the opening quarter and first half of next year.”