Consumer Spending Probably Lifted Growth: U.S. Economy Preview

Spending by American consumers probably picked up in the third quarter, helping the world’s largest economy overcome a slump in business investment that is holding back the expansion.

Gross domestic product rose at a 1.8 percent annual rate after expanding at a 1.3 percent pace the prior quarter, according to the median forecast of 66 economists surveyed by Bloomberg ahead of Commerce Department data Oct. 26. It would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.

An improving housing market is helping boost household confidence just as companies cut back on replacing outdated equipment on concern about the so-called fiscal cliff. Federal Reserve policy makers will meet this week for the first time since announcing another round of stimulus in August aimed at shoring up growth that may help reduce unemployment.

“The economy is still in recovery mode,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “The consumer is looking better than we’d anticipated. Business spending is a concern.”

Consumer spending is projected to have increased at a 2.1 percent annual rate last quarter following a 1.5 percent gain from April through June, according to the survey median.

Retail sales in September and August had the best back-to- back showing since late 2010 as shoppers snapped up goods from cars to Apple Inc.’s iPhones, a sign demand was heading into the year-end holidays on a high note. Target Corp. (TGT), the second- biggest U.S. discounter, was among chains whose same-store sales last month topped analysts’ estimates.

Auto Sales

Cars and light trucks sold at a 14.9 million annual pace in September, the most since March 2008, according to Ward’s Automotive Group. Chrysler Group LLC and General Motors Co. (GM) reported gains.

A drop in joblessness and firming home prices mean consumer confidence may keep strengthening this quarter. The Thomson Reuters/University of Michigan final index of sentiment, also due on Oct. 26, jumped to 83 in October, the highest level since September 2007, according to the Bloomberg survey.

Payrolls rose 114,000 in September after a 142,000 increase the prior month, while the unemployment rate dropped to a three- year low of 7.8 percent from 8.1 percent, according to Labor Department figures.

Employment and the economy are central themes in the campaigns of President Barack Obama and Republican challenger Mitt Romney ahead of the Nov. 6 presidential elections. The two candidates will have their third and final debate tomorrow, this time on foreign policy.

Fed Action

To spur growth and reduce unemployment, Fed policy makers last month began an open-ended quantitative easing program, for the first time not specifying how long it would last or its total size. The central bank’s statement after the Oct. 23-24 meeting may shed more light on its latest assessment of the economy and the labor market.

“Economic activity generally expanded modestly since the last report,” the Fed said in its Beige Book survey released on Oct. 10. Consumer spending was “flat to up slightly,” while “residential real estate showed widespread improvement.”

Manufacturers, on the other hand, may be hesitant to invest amid the looming fiscal cliff of more than $600 billion in tax increases and government spending cuts set to take effect early next year unless Congress acts. In addition, slowing global growth is also hurting exports.

Honeywell International Inc. (HON) lowered its full-year sales forecast on weaker demand for aerospace parts and falling auto production in Europe. The Morris Township, New Jersey-based maker of turbochargers and cockpit controls joined industrial peers General Electric Co. and Parker Hannifin Corp. in cutting forecasts last week.

‘Conservative Planning’

“Turning to 2013, the clarity on the macro side is still murky,” Honeywell Chief Executive Officer Dave Cote said on an Oct. 19 conference call with analysts. “There’s nothing out there to suggest anything but continued conservative planning at best.”

Disappointing results at companies like GE and Microsoft Corp. announced on Oct. 19 triggered the biggest one-day decline in stocks since June. The Standard & Poor’s 500 Index fell 1.7 percent to close at 1,433.19.

A Commerce Department report on Oct. 25 may show orders for durable goods grew 7 percent in September after falling 13.2 percent the prior month, the biggest drop since January 2009, according to the Bloomberg survey median. Excluding transportation equipment, where demand is often volatile, bookings advanced 0.9 percent after falling a combined 5.1 percent over the previous three months.

Home Sales

Reinforcing evidence of a rebound in housing, new-home sales climbed last month to a 385,000 annual rate, the highest since April 2010, economists in the Bloomberg survey projected ahead of Commerce Department figures Oct. 24.

A day later, the National Association of Realtors may report more Americans signed contracts to purchase previously owned homes in September. The index of pending home sales rose 2.5 percent following a 2.6 percent drop in August, economists predicted.

                      Bloomberg Survey
==============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
==============================================================
New Home Sales ,000’s    10/24     Sept.      373       385
New Home Sales MOM%      10/24     Sept.     -0.3%      3.2%
Durables Orders MOM%     10/25     Sept.     -13.2%     7.0%
Durables Ex-Trans MOM%   10/25     Sept.     -1.6%      0.9%
Cap Goods Core MOM%      10/25     Sept.      1.1%      0.3%
Initial Claims ,000’s    10/25     20-Oct     388       370
Pending Homes MOM%       10/25     Sept.     -2.6%      2.5%
GDP Annual QOQ%          10/26      3Q A      1.3%      1.8%
Personal Consump. QOQ%   10/26      3Q A      1.5%      2.1%
U of Mich Conf. Index    10/26     Oct. F     83.1      83.0
==============================================================

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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