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US economy at 2.8 percent growth, but what happens next? (+video)

Data suggest that US economic growth wasn’t as strong as the 2.8 percent figure sounds. The economy is expected to drop a bit in coming months before it improves in 2014, economists say.

US economy grew faster than forecast
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The US economy grew at a 2.8 percent rate in the third quarter, but the underlying pace of consumer activity was still tepid heading into the year’s final quarter.

The real question, though, is what happens after that.

Yes, the third quarter wasn’t as strong as the 2.8 percent growth of gross domestic product (GDP) sounds. The gains were driven largely by a rise in business inventories. And the fourth quarter should be slower still, due to the effects of a partial government shutdown during October.

 

But many forecasters expect that 2014 will be a better year for the economy – at least modestly – if President Obama and Congress can avoid more damaging standoffs over the budget.

“We are expecting around a 2.5 percent growth rate or better for real consumer spending next year,” based on an improving job market and possible gains in household wealth, says Ellen Zentner, an economist at the investment firm Morgan Stanley, in a new report to clients.

By contrast, consumer spending growth grew about 2.2 percent in 2012, and has been weaker than that so far this year, according to the Commerce Department’s GDP statistics.

Consumer spending grew at a 1.5 percent annual pace in the July-through-September quarter, down from 1.8 percent in the prior quarter.

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In other parts of the economy, foreign trade gave a boost to GDP in the third-quarter as exports grew faster than imports. Business investment rose at a modest pace.

Economists also see the public sector’s role in the economy stabilizing. Spending cuts have helped to bring federal deficits down, but have also detracted from consumption in the near term.

Total government consumption increased by 0.2 percent in the third quarter, as a rebound in state and local spending offset federal declines rooted partly in automatic budget cuts known as the “sequester.”

A revival in tax revenues has given states more leeway to spend.

The rise in inventory stockpiling by businesses was large – representing 0.8 percent of the quarter’s 2.8 percent growth rate. It remains to be seen whether that will result in a slowdown at US factories in the fourth quarter.

Meanwhile, the effects of the partial federal shutdown in October could shave about half a percentage point off fourth-quarter growth, some forecasters say.

Political battles over the budget could resume in the new year, since the October shutdown ended with only a temporary agreement on funding the government through mid-January. But with 2014 being an election year, it may be that both sides opt to avoid the kind of brinkmanship seen in October.

 

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