U.S. Economy Probably Picked Up in Third Quarter on Consumer Spending Gain

The U.S. economy probably grew in the third quarter at the fastest pace this year, easing anxiety that the recovery was on the verge of stalling, economists said before a report this week.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate after advancing 1.3 percent in the previous three months, according to the median forecast of 68 economists surveyed by Bloomberg News before the Commerce Department’s Oct. 27 release. Orders for business equipment rose in September and new-home sales stabilized, other data may show.

Consumer spending last quarter may have climbed more than twice as fast as in the prior three months, helping the economy withstand the plunge in stocks caused by Europe’s debt crisis. Nonetheless, the pace of growth has failed to cut unemployment, prompting Federal Reserve officials like Janet Yellen and Daniel Tarullo to say that more monetary stimulus may be needed.

“We’ve gotten a reversal of some of the bigger shocks that really restrained growth in the first half of year,” said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York. “The economy could grow at the rates we see now or even better if we could avoid some of the shocks from Europe and the uncertainty around U.S. fiscal policy.”

The economy expanded at a 0.9 percent rate in the first half of 2011, the weakest since the recession ended in June 2009. The risk that one or more of the countries in the euro zone would default helped trigger a plunge in stock values. The Standard & Poor’s 500 Index fell 14 percent in the third quarter, the worst decline since the final three months of 2008.

With data showing growth has picked up, shares have climbed. The S&P 500 is up 9.4 percent so far this month.

Consumer Confidence

The rebound may be helping household sentiment. The Conference Board’s consumer confidence gauge climbed in October for a second month, rising to 46.5 from 45.4, according to the median projection in a Bloomberg survey before the New York group’s Oct. 25 report. Even with the gain, the measure is close to a two-year low as unemployment hovers around 9 percent.

“We continue to be cautious with respect to the magnitude and pace of the economic recovery both here in the U.S. and abroad and about the level of consumer confidence,” Todd Teske, chairman and chief executive officer at Briggs & Stratton Corp. (BGG), said on an Oct. 22 conference call with analysts.

Sales for the quarter ended Oct. 2 at the world’s largest maker of engines for outdoor power equipment rose 19 percent from the same three months in 2010, led by purchases of portable generators.

Gasoline Prices

Cheaper energy costs may have helped Americans spend on other goods and services in August and September even amid diminished confidence. The cost of a gallon of gasoline at the pump was $3.43 at the end of September, down 7.5 percent from the July high of $3.71, according to AAA, the largest U.S. auto organization.

Consumer purchases, which account for about 70 percent of the economy, increased at a 1.9 percent annual pace from July through September after gaining 0.7 percent in the second quarter, according to the median projection ahead of the Commerce Department’s GDP release.

Corporate investment in new equipment may have also contributed to the acceleration in growth last quarter. A report from the Commerce Department on Oct. 26 will show a 0.4 percent rise in September orders for durable goods excluding transportation equipment, according to the median forecast in a Bloomberg survey.

New-Home Sales

The same day, another report from the Commerce Department may show new-home sales increased in September to a 300,000 annual rate from a six-month low 295,000 pace in August, a sign the industry is struggling to gain its footing.

Yellen, the Federal Reserve’s vice chairman, said on Oct. 21 that a third round of large-scale securities purchases may be necessary to boost the economy and spur hiring. A day earlier, Fed Governor Tarullo, said the central bank should consider resuming large-scale purchases of mortgage bonds to help combat a “crisis” in employment.

The residential real estate industry, since 1982, has aided every economic recovery except the current one that began in June 2009.

The Fed’s Open Market Committee announced Sept. 21 a plan to replace some debt in the central bank’s portfolio with longer-term Treasuries in an effort to cut borrowing costs. Central bankers also said they would reinvest maturing housing debt into mortgage-backed securities. Housing weakness is a key reason for the “frustratingly slow pace of the recovery,” Fed Chairman Ben S. Bernanke said during a Sept. 8 speech.

                        Bloomberg Survey

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                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
==============================================================
Case Shiller Monthly MO  10/25      Aug.      0.1%      0.2%
Case Shiller Monthly YO  10/25      Aug.     -4.1%     -3.6%
Consumer Conf Index      10/25      Oct.      45.4      46.5
Durables Orders MOM%     10/26     Sept.     -0.1%     -0.9%
Durables Ex-Trans MOM%   10/26     Sept.     -0.1%      0.4%
Cap Goods Core MOM%      10/26     Sept.      0.9%      0.3%
New Home Sales ,000’s    10/26     Sept.      295       300
New Home Sales MOM%      10/26     Sept.     -2.3%      1.7%
GDP Annual QOQ%          10/27      3Q A      1.3%      2.5%
Personal Consump. QOQ%   10/27      3Q A      0.7%      1.9%
GDP Prices QOQ%          10/27      3Q A      2.5%      2.4%
Core PCE Prices QOQ%     10/27      3Q A      2.3%      2.2%
Initial Claims ,000’s    10/27     22-Oct     403       400
Cont. Claims ,000’s      10/27     15-Oct     3719      3700
Pending Homes MOM%       10/27     Sept.     -1.2%      0.1%
Pers Inc MOM%            10/28     Sept.     -0.1%      0.3%
Pers Spend MOM%          10/28     Sept.      0.2%      0.6%
PCE Deflator YOY%        10/28     Sept.      2.9%      3.0%
Core PCE Prices MOM%     10/28     Sept.      0.2%      0.1%
Core PCE Prices YOY%     10/28     Sept.      1.6%      1.7%
Employ Costs QOQ%        10/28       3Q       0.7%      0.6%
U of Mich Conf. Index    10/28     Oct. F     57.5      58.0
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To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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