Economy expands 2.8 percent in third quarter, but consumer spending slows

November 7, 2013

Even good news comes with a caveat in the nation’s long-simmering economic recovery.

First, the bright side: The U.S. economy grew faster than expected over the summer, according to government data released Thursday. The 2.8 percent annual growth rate is the best showing since last fall.

Now, the downside: Driving the increase was a buildup in business inventories amid slack sales. Heightened uncertainty heading into the government shutdown dampened growth in consumer spending. In addition, the U.S. imported fewer goods, which also inflated the nation’s gross domestic product.

The GDP report is “deceptively weak,” said Alan MacEachin, corporate economist at Navy Federal Credit Union. “You drill down below the surface, and you can see what’s going on.”

The data do not include the direct effects of the shutdown last month. That damage will likely show up in the fourth quarter, and analysts expect it will shave about half a percentage point from economic growth.

The first real glimpse of the shutdown’s impact will come Friday when the government’s monthly tally of employment is released.

MacEachin said he is lowering his forecast for job creation to just 110,000 for October, based on the GDP report. The average estimate is 120,000 jobs — far below the 200,000 needed to fuel a more robust recovery.

“This is not an economy that is firing on all cylinders,” said James Marple, senior economist for TD Economics.

Many economists had hoped that the recovery would reach cruising altitude by the end of this year. But higher interest rates, sluggish job growth and the fiscal follies in Washington have pushed expectations back to early next year — or even later.

American shoppers will play a key role in determining how quickly the economy can bounce back. Consumer spending accounts for roughly two-thirds of GDP, and government data showed the pace of its growth slowing to a 1.5 percent annual rate during the third quarter.

The government shutdown threatens to erode those gains even further. Gallup’s index of consumer confidence plunged 16 points in October, the biggest monthly drop since the poll began in 2008. It has not yet returned to its pre-shutdown levels.

But other data released Thursday suggested that Americans may be more resilient. About three dozen national retailers reported sales at existing stores rose 5 percent in October compared to the same month last year. The analysis by the International Council of Shopping Centers is slightly distorted by Hurricane Sandy last year, but the trade group’s chief economist Michael P. Niemira said the results were still encouraging.

“It would appear that the consumer has come back, just at the right time,” he said.

Meanwhile, housing remained one of the bright spots in the economy despite concerns that higher interest rates might undercut its momentum. Residential investment increased at a 14.6 percent annual rate during the third quarter, on par with the previous three months.

State and local government expenditures increased 1.5 percent, while federal cuts were not as deep as expected.

Keith Hall, senior research fellow at the Mercatus Center at George Mason University and former director of the Bureau of Labor Statistics, said he expects the fiscal crisis to chip away at GDP during the fourth quarter. But since federal workers will receive back pay and no contracts were canceled, most of the loss will be made up early next year.

He noted that the last government shutdown in 1995 shaved about half a percentage point from GDP. But the economy came roaring back the next quarter, nearly doubling its pace of growth.

“There’s almost always some catch-up that goes on,” he said. “I’m not sure there’s going to be any real lasting effect.”

Thursday’s data add to the muddled picture of the economy facing the Federal Reserve as it debates whether to keep pumping money into the recovery. The Fed has said it will maintain the stimulus until there is substantial improvement in the outlook for the job market.

Earlier this year, the Fed broached the possibility of dialing back its $85 billion-a-month stimulus program by December. The major U.S. stock market indexes dropped by a percentage point on Thursday as investors worried that such a move could come soon. But many economists do not expect the Fed to act until the spring, after new deadlines for negotiating the federal budget and the government’s borrowing limit have passed.

“The one caveat to expectations for faster economic growth is that political dysfunction has to stay out of the front pages. With any luck, the current budget negotiations will remove some of the more draconian sequestration cuts and help the process along,” Marple said. “Fingers firmly crossed.”

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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