By Josh Newell

WASHINGTON (MNI) – The U.S. economy is expected to grow somewhat faster in
the third quarter, as consumer spending and the housing sector should provide a
boost, though business investment and trade are forecast to be weak, analysts
say.

According to a survey of economists by MNI, the advance estimate of Q3 GDP
is expected to show 1.8% growth, higher than the 1.3% growth seen in Q2 but
still weak amid headwinds due to the looming fiscal cliff and the continued
European crisis.

The threat of the fiscal cliff especially is having a negative effect on
business investment, Sam Bullard, senior economist at Wells Fargo, told MNI.

“We have most definitely been seeing the effect of the fiscal cliff in the
ISM reports and are certainly looking at a significant contraction in business
fixed investment in the fourth quarter and weak growth in the third quarter,”
Bullard said in a phone interview Wednesday,

He pointed to Wednesday’s durable goods report, which showed that
nondefense capital goods ex-aircraft shipments declined 4.9% at a three-month
annualized rate. This drop in core capital goods could cause “third quarter
equipment and software spending (a subsector of business investment) to contract
1.5%.”

The ISM manufacturing index pointed to growth in September, with a reading
of 51.5, but the two prior months the index posted below-50 readings, indicating
contraction in the manufacturing sector in the quarter.

The strengthening housing sector is expected to reverse some of these
declines in investment, and Bullard said, “we expect residential construction
spending will record another solid gain.”

However, Bullard also pointed out, “The constraint on housing is that it is
such a small component of GDP, so even with growth its only contributing a very
modest amount.”

“Certainly, however, there are indirect impacts,” he said. “People may have
increased optimism due to the stronger housing market, which could have added
benefits to consumer spending. This is why housing can still underpin economic
growth.”

Consumer spending has indeed risen recently and is expected to drive growth
for Q3.

Michael Englund, chief economist at Action Economics, told MNI,
“Consumption is going to be performing better, possibly up 1.8%.”

He mentioned stronger retail sales, as the GDP input, sales excluding
autos, gasoline, and building materials, increased 0.9% and 0.1% in September
and August.

Overall retail sales have risen 1.2% and 1.1% respectively, though Englund
cautioned that “some of this is a price effect, meaning real sales weren’t quite
as high.”

While domestic consumer spending is growing moderately, the slowdown in
China and continued European crisis means trade is not likely to have a strong
positive impact on GDP.

“Trade is pretty much a neutral, but the shock from abroad is greater than
the shock from home, so when global trade slows this can help our GDP number,
though trade has essentially been a minor factor,” he said.

Bullard agreed, saying, “Led by a rebound in real import growth and softer
real export growth, we expect trade will not contribute anything to third
quarter GDP.”

The last GDP component, government spending, is expected to be down for the
ninth straight quarter; however, there is some slight upside bias.

Jay Feldman, economist at Credit Suisse, said he believes spending will
grow for the quarter, telling MNI, “Defense spending could be up, as the defense
numbers bounce around a lot and have been weak the last two quarters.”

He emphasized that he does not think this is the beginning of a new trend.

The Commerce Department will release the advance estimate of Q3 GDP Friday
at 8:30 a.m. ET.

** MNI Washington Bureau: 202-371-2121 **

–email: dcoffice@mni-news.com

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