GDP'S giddy-up may not last
- Article by: NELSON D. SCHWARTZ
- New York Times
- November 29, 2012 - 8:47 PM
Even though government figures showed Thursday that the U.S. economy grew faster than first estimated in the third quarter, economists warned that the pace of expansion could slow drastically in the final months of the year amid the fiscal standoff in Washington and growing caution on the part of businesses.
The Commerce Department said Thursday that gross domestic product expanded at an annual rate of 2.7 percent in the three months ended Sept. 30, well above the 2 percent estimate it initially made in late October. But the revision was driven by increased inventory accumulation and a jump in federal spending -- factors unlikely to be repeated in the current quarter, economists said.
"It's a nice headline number," said Nigel Gault, chief U.S. economist at IHS Global Insight, "but it exaggerates the underlying momentum in the economy. Sustainable improvements in growth are not driven by inventories."
What's more, the revised figures show that spending by businesses on equipment and software declined by 2.7 percent in the third quarter, the first decrease since the end of the recession in mid-2009. Gault attributed the weak spending by companies in large part to growing uncertainty among executives about whether Congress and the White House can reach a deal before Jan. 1 that averts more than $600 billion in automatic tax increases and spending cuts from going into effect early next year.
"The No. 1 thing is the fiscal cliff," Gault said.
The impasse in Washington has not only dominated the political debate since the election but has also become a leading worry for corporate America. President Obama met with business leaders Wednesday to seek their support in negotiating a compromise, the second time he has sat down with prominent corporate chiefs this month, while Wall Street has wavered with each zig and zag of the debate.
The president and congressional Democrats favor letting Bush-era tax cuts expire for top earners, while many Republicans have opposed any rise in tax rates and are pressing for greater reductions in federal spending.
Most observers expect a short-term compromise to be found that blunts the full effect of the tax increases and spending reductions, but economists say the risks to future growth are mounting. If a deal is not reached, the economy will grow at an annual rate of just 1.1 percent in 2013, according to a forecast issued Thursday by Macroeconomic Advisers, with unemployment rising to 8.5 percent by the end of the year.
Jobless rate still too high
Unemployment now stands at 7.9 percent, still far above the level before the financial crisis and the recession, and it is not expected to come down significantly unless economic growth accelerates. For now at least, that seems unlikely.
"Overall, it was a disappointing report," said Michelle Meyer, senior U.S. economist with Bank of America Merrill Lynch.
The accumulation of inventories went from subtracting 0.1 percentage points from the initial estimate to adding 0.8 percentage points, she said.
"A lot of that inventory build was unintentional, which suggests a downside risk for the fourth quarter," she said. "Businesses had expected stronger sales and consumer spending and were caught off guard."
Meyer said she expected the economy to grow by 1 percent in the fourth quarter of 2012.
There were signs of optimism in Thursday's data. Residential fixed investment rose 14.2 percent, a sign that the housing recovery is gaining steam. Indeed, a separate report Thursday from the National Association of Realtors showed pending home sales rose to a 2 1/2-year high.
Indeed, not all economists took a pessimistic view of the new data.
"Just because the private sector is going into neutral doesn't mean we have to automatically have to have a recession," said Michael Gapen, senior U.S. economist and asset allocation strategist at Barclays. "Households are deleveraging, corporate balance sheets are strong, and business isn't overextended."
"Short of a policy mistake in Washington, it's tough to get a recession right now," he said.
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