Fourth-Quarter U.S. GDP Forecasts Lowered on ShutdownMichelle Jamrisko, Ben Schenkel and Catarina Saraiva
The U.S. economy will probably expand at a 2 percent annualized rate in the final three months of the year, less than economists projected at the start of the budget impasse that resulted in a 16-day government shutdown.
The median projection of 71 economists surveyed by Bloomberg yesterday compares with a 2.4 percent forecast in an Oct. 4-9 survey. Gross domestic product, the sum of all goods and services produced in the nation, will accelerate to a 2.6 percent growth rate in the first three months of 2014, unchanged from the previous survey, economists said.
Fourth-quarter GDP will reflect a decline in government output, estimated by the number of hours put in by federal workers, as well as cutbacks at contractors. Growth will pick up in the first quarter as the economy recovers from any shutdown-induced pause in business and consumer purchases.
“If you have a shutdown and people in the government aren’t working, there’s an automatic effect on GDP,” said Lewis Alexander, chief economist at Nomura Securities International Inc. in New York. The negative effects of the budget negotiations on business and consumer spending will subside in the first quarter, he said, unless there’s “a repeat of the brinkmanship we saw in October, even without a shutdown.”
Alexander projects 1.9 percent growth in the final three months, before a pickup to 2.6 percent in the first quarter. Economists at Nomura had estimated a 2.7 percent rate for both quarters in the previous survey. The decline in hours worked by government employees probably shaved 0.2 percentage point to 0.3 percentage point from growth in the current quarter, according to Nomura.
A report today showed manufacturing remains a source of strength at the start of the fourth quarter. The Institute for Supply Management’s factory index climbed to the highest level since April 2011, the Tempe, Arizona-based group said.
The first of three reports on growth last quarter, originally scheduled for release earlier this week, is now due Nov. 7 as the shutdown kept federal agencies from collecting data. The median estimate in a preliminary survey of economists calls for a 1.9 percent gain in the three months ended September. The U.S. expanded at a 2.5 percent annualized pace in the second quarter.
The postponement of the government’s data releases has made it difficult for economists to gauge the economy’s progress. The shutdown probably inhibited what was already a sluggish pace of growth at the end of the third quarter, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
“It looks like September wasn’t a great month, and that was pre-shutdown, so I think things are just kind of so-so minus the shutdown,” Feroli said. “We’re only now starting to get a look at October data. It’s generally what we would expect -- things seem to have slowed a little, but not a big break.”
JPMorgan economists forecast 2 percent growth this quarter and 2.5 percent at the start of 2014. Feroli also estimates about 0.25 percentage point will be trimmed from fourth-quarter GDP because of the loss in government services, with an equal amount shaved because of “spillover effects and lost activity” elsewhere in the economy.
While the end of the shutdown on Oct. 17 helped stabilize a measure of Americans’ outlook for the economy, households grew more pessimistic about their finances and the buying climate as the Bloomberg Consumer Comfort Index fell last week for a fifth straight time. The gauge declined to the lowest level since October 2012.
“If sentiment holds at these lower levels in the coming months, that is likely to translate into lower spending activity for both businesses and households,” said Millan Mulraine, director of U.S. rates research at TD Securities USA LLC in New York. The firm’s fourth-quarter estimate for GDP was reduced to 1.8 percent from 2.6 percent earlier in the month, while the first-quarter estimate for 2014 was left at 2.4 percent.
The slump in consumer confidence may hold back the household purchases that make up 70 percent of the economy as the U.S. enters the holiday shopping season. Some Americans already have been cutting back on non-essential spending. Las Vegas-based Caesars Entertainment Corp., the largest owner of casinos in the U.S., said fewer Americans have been making trips to its regional locations.
“Generally in retail experiences across the country, people are not as active as they’ve been in prior years,” Gary Loveman, chairman and chief executive officer of Caesars, said on an Oct. 29 earnings call. “That’s a troubling trend.”
The Federal Reserve said this week it is pressing on with $85 billion in monthly asset purchases as part of its third round of quantitative easing started in September 2012.
“The recovery in the housing sector slowed somewhat in recent months,” the Federal Open Market Committee said at the end of a two-day meeting in Washington. “Fiscal policy is restraining economic growth.”