December 22, 2010

GDP for Q3 Revised Upward; Existing Home Sales Rise but Still Weak

Some analysts see growth surging to near 4% for 2011

WASHINGTON (AP) — Expectations for economic growth next year are turning more optimistic now that Americans will have a little more cash in their pockets.

A cut in workers' Social Security taxes and rising consumer spending have led economists to predict a strong start for 2011.

Still, most people won't feel much better until employers ramp up hiring and people buy more homes.

Analysts are predicting economic growth next year will come in close to 4%. It would mark an improvement from the 2.8% growth expected for this year and would be the strongest showing since 2000.

"Looking ahead, circumstances are ripe for the economy to develop additional traction," said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York. He is estimating growth for 2011 to be above 3.5%.

GDP Revised Upward

The economy grew at a moderate pace last summer, reflecting stronger spending by businesses to replenish stockpiles, the Commerce Department reported Wednesday. Gross domestic product increased at a 2.6% annual rate in the July-September quarter. That's up from the 2.5% pace estimated a month ago. While businesses spent more to build inventories, consumers spent a bit less.

Many analysts predict the economy strengthened in the October-December quarter. They think the economy is growing at a 3.5% pace or better mainly because consumers are spending more freely again.

Existing Home Sales Rise

Still, the housing market remains a drag on the slowly improving economy.

The National Association of Realtors reported Wednesday that more people bought previously owned homes rose in November. The sales pace rose 5.6% to a seasonally adjusted annual rate of 4.68 million units. Even with the gain, sales are still well below what analysts consider a healthy pace.

Even if analysts are right about 2011 being a better year for the economy, growth still wouldn't be strong enough to dramatically lower the 9.8% unemployment rate.

By some estimates, the economy would need to grow by 5% for a full year to push down the unemployment rate by a full percentage point. Even with growth at around 4%, as many analysts predict, the unemployment rate is still expected to hover around 9%.

The third-quarter's performance marks an improvement from the feeble 1.7% growth logged in the April-June quarter. The economy's growth slowed sharply then. Fears about the European debt crisis roiled Wall Street and prompted businesses to limit their spending.

"It sure looks like the 'soft patch' is over," said Nariman Behravesh, chief economist at IHS Global Insight.

In the third quarter, greater spending by businesses on replenishing their stocks was the main factor behind the slight upward revision to GDP.

Consumers boosted their spending at a 2.4% pace. That was down from a 2.8% growth rate previously estimated. Even so, consumers increased their spending at the fastest pace in four years. The slight downward revision reflected less spending on health care and financial services than previously estimated.

More recent reports from retailers, however, show that shoppers are spending at a greater rate in the final months of the year.

Companies are discounting merchandise to lure shoppers. A price gauge tied to the GDP report showed that prices — excluding food and energy — rose at a 0.5% pace in the third quarter, the slowest quarterly pace on records going back to 1959.

Americans have more reasons to be confident. Stock prices are rising, helping Americans regain vast losses in wealth suffered during the recession. Job insecurity remains a problem, but the hiring market is slowly improving. And loans aren't as difficult to obtain for those with solid credit histories.

Even with the improvements, though, consumers are showing some restraint. In the past, lavish spending by consumers propelled the economy to grow at a rapid pace. After the 1981-1982 recession, the economy expanded at a 9.3% clip. Consumers increased their spending at an 8.2% pace.

Consumers have yet to display that level of confidence in the economy. While hiring is improving, employers still aren't adding enough jobs to lower the unemployment rate.

Even with stronger economic growth anticipated for next year, analysts predict it will still take until near the end of this decade to drop unemployment back down to a more normal 5.5% to 6% level.

The government's estimate of GDP in the July-September quarter was its third and final one. The government makes a total of three estimates for any given quarter. Each new reading is based on more complete information. GDP measures the value of all goods and services — from machinery to manicures — produced within the United States.

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