October 23, 2012 / 8:08 PM / in 8 years

Consumers seen lifting GDP, but pace sluggish

WASHINGTON (Reuters) - A late spurt in consumer spending probably lifted U.S. economic growth in the third quarter, but the pace of expansion will be too meager to raise hopes stubbornly high unemployment will come down much further anytime soon.

A Home Depot store is pictured in Daly City, California, February 21, 2012. REUTERS/Beck Diefenbach

U.S. gross domestic product likely grew at a 1.9 percent annual rate in the third quarter, according to a Reuters poll of economists. That would mark a step up from the second quarter’s anemic 1.3 percent pace, but still fall well short of the 2.5 percent to 3 percent pace economists say is needed over several quarters to significantly dent unemployment.

The Commerce Department will release the GDP report at 8:30 a.m. EDT (1230 GMT) on Friday, just over a week before Americans go to the polls in a tightly contested race for the White House.

U.S. President Barack Obama and Republican challenger Mitt Romney are in a dead heat. While the economy’s health is at the core of the November 6 election, the report will probably not hold much sway as it will show little change in the fundamental picture.

An 11th hour burst in consumer spending, driven by automobile purchases and with a helping hand from Apple Inc’s (AAPL.O) iPhone 5, is seen supporting GDP growth in the third quarter. Robust gains in home building will also help.

“Consumers did their part, especially given the headwinds of higher energy prices and a still very weak jobs market. The economy is still lacking that spark that we need to really get it moving more quickly,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, is expected to have grown at a rate of at least 2 percent in the third quarter after increasing at a 1.5 percent pace in the prior period.


Though the jobless rate has dropped by 2.2 percentage points to 7.8 percent from its 10 percent peak in October 2009, the decline has been due to Americans giving up the hunt for work.

The economy, which has struggled to grow above a 2 percent pace since the 2007-09 recession ended, has been too sluggish to create the jobs needed to lower unemployment.

The third-quarter GDP report is not expected to deviate much from that pattern, which should keep the Federal Reserve on its ultra easy monetary policy path. Officials at the U.S. central bank started a regular two-day meeting on Tuesday and no major changes to policy were expected.

Last month the Fed announced a plan to buy $40 billion worth of mortgage-backed securities each month until it sees a sustained turnaround in employment. It hopes the purchases will drive down long-term borrowing costs and spur the recovery.

“Growth is not enough to bring down the unemployment rate significantly and that’s going to keep the Fed on its open ended (quantitative easing) program. We are not going to see stronger GDP growth until the middle of 2013,” said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh.

Despite the anticipated improvement in economic performance from the prior quarter, the composition of growth is likely to be rather unfavorable and the pace of consumer spending may not be sustainable without a significant pickup in job creation.

High stock prices and firming house values have made households a bit more willing to take on new debt, supporting consumer spending. A mild increase in wages has also helped.


Inventories are also expected to account for a portion of third-quarter GDP growth, although they are a bit of a wild card given that a drought in the country’s Midwest has decimated grain and corn crops, reducing farm inventories.

Aside from the impact of the drought, companies do not appear to have cut back on inventories despite a highly uncertain economic outlook.

Excluding inventories, however, the report will likely show only a marginal increase in domestic demand.

Business spending likely contracted for the first time since the first quarter of 2011.

Much of the drag in business spending, which has been a source of strength since the recession ended, is expected to come from weak outlays on equipment and software, reflecting uncertainty over the nation’s fiscal policy.

Spending on nonresidential structures is also expected to have contracted after five straight quarters of growth.

A shopper carries bags through Times Square in New York, July 27, 2012. REUTERS/Andrew Burton

While investment in home building likely saw a double-digit increase - thanks to record low mortgage rates and improving property values - housing only accounts of about 2.5 percent of GDP, making its contribution marginal.

Government spending is expected to have been a drag on growth for a ninth straight quarter.

In addition, slowing global demand, especially in Europe and China, probably undercut U.S. exports. That likely left a trade deficit that weighed on GDP growth.

Reporting by Lucia Mutikani, editing by Tim Ahmann and Chizu Nomiyama

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