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Good news for insurers: U.S. economy topped forecast in 3Q

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(Bloomberg) — The economy in the U.S. expanded more than forecast in the third quarter, capping its strongest six months in more than a decade, as gains in government spending and a shrinking trade deficit made up for a slowdown in household purchases.

Gross domestic product grew at a 3.5 percent annualized rate in the three months ended September after a 4.6 percent gain in the second quarter, Commerce Department figures showed today in Washington. It marked the strongest back-to-back readings since the last six months of 2003. The median forecast of 87 economists surveyed by Bloomberg called for a 3 percent advance.

Growing oil production is limiting imports and contributing to a pickup in manufacturing, allowing the economy to overcome slowing growth in overseas markets from Europe to China. At the same time, job gains and cheaper gasoline are giving American consumers the confidence and the means to spend, brightening the outlook for the holiday-shopping season and helping explain why the Federal Reserve ended its bond-buying program yesterday.

The economy “is on a firm footing, and if the labor market continues to get better, that’s the primary support to consumer spending,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly forecast the growth in GDP. “The demand side of the equation was very healthy in the third quarter.”

Shares Fall

Stock futures declined as the faster-than-estimated growth last quarter fueled speculation the economy is be strong enough for the Fed to raise interest rates sooner than estimated. The contract on the Standard & Poor’s 500 Index maturing in December fell 0.3 percent to 1,966.9 at 8:52 a.m. in New York.

Forecasts in the Bloomberg survey of economists ranged from 2.1 percent to 4 percent. Today’s estimate is the first of three for the quarter, with the other releases scheduled for November and December when more information becomes available.

Another report today showed jobless claims rose by 3,000 to 287,000 in the week ended Oct. 25, in line with the median forecast of economists surveyed by Bloomberg, a Labor Department report showed today in Washington. The four-week average, a less volatile measure than the weekly figures, declined to 281,000, the fewest since May 2000.

The report on third-quarter growth is the last major economic indicator before next week’s mid-term election, in which Republicans are expected to expand their majority in the House and perhaps net the six seats they need to take control of the Senate.

Mid-Term Election

President Barack Obama’s fellow Democrats have struggled against the headwinds of his underwater approval rating, which has been mired below 45 percent in recent polls, and stagnant wages.

The second quarter’s 4.6 percent jumped reflected a rebound from a 2.1 percent slump in the first quarter that partly reflected a harsh winter.

Consumer spending, which accounts for almost 70 percent of the economy, climbed at a 1.8 percent pace last quarter after growing at a 2.5 percent rate in the previous three months, today’s report showed.

The gain in household consumption compared with a 1.9 percent median forecast in the Bloomberg survey. Purchases added 1.2 percentage points to growth.

Consumer Confidence

Improving consumer sentiment may help lift the biggest part of the economy this quarter. Confidence this month jumped to a seven-year high, according to figures from the Conference Board.

That has companies such as Benton Harbor, Michigan-based Whirlpool Corp. optimistic about their outlooks.

“U.S. appliances demand continued to strengthen in the third quarter,” Marc Bitzer, who oversees North America, Europe, Africa, and the Middle East for Whirlpool, said in an Oct. 28 earnings call. “We continue to see improvements in employment and consumer confidence, which bodes well for all aspects of demand in the U.S.”

Sustained improvement in the job market will be needed to give households the income and the confidence to continue purchases. Payrolls climbed by 248,000 in September and the jobless rate declined to 5.9 percent, the lowest level since July 2008.

The biggest drop in crude prices since the global financial crisis six years ago may also boost GDP, as cheaper fuel gives consumers extra spending money heading into the holiday shopping season. Looking forward economists expect growth to hover around 3 percent through the first quarter of 2015.

Fed Policy

The Federal Reserve yesterday confirmed it will end the asset-buying program this month that added $1.66 trillion to its balance sheet while maintaining a pledge to keep interest rates low for a “considerable time.”

Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the Federal Open Market Committee said in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that “there remains significant underutilization of labor resources.”

Government spending climbed at a 4.6 percent pace, the most since the second quarter of 2009, today’s report showed. The pickup reflected a rebound in defense outlays.

Trade Deficit

The trade gap narrowed to $409.9 billion from $460.4 billion in the second quarter as imports dropped, reflecting fewer purchases of foreign oil and consumer goods. The narrowing deficit added 1.3 percentage points to GDP, the most since the second quarter of 2009.

A further narrowing of the deficit may be difficult to achieve as the slowdown in global growth hurts exports, said Societe Generale’s Jones.

“You have to worry about trade in particular, with the stagnant situation in Europe and potentially slower growth in China,” said Jones. “You wonder how long we can keep those exports up.”

Inventories grew at a slower pace, subtracting almost 0.6 percentage points from growth. Excluding stockpiles, so-called final sales climbed at a 4.2 percent pace last quarter, the most since 2010.

The trade gap and inventories are two of the most volatile components in GDP calculations, and can show significant revisions in subsequent reports.

–With assistance from Jonathan Allen and Alex Tanzi in Washington.