While the sizzling pace of third-quarter growth isn't likely to be repeated in the fourth quarter, economists say a broad-based recovery is finally starting to take shape.
Gross domestic product rose at a 7.2% annual rate in the third quarter, the fastest pace since the first quarter of 1984 and more than double the 3.3% rate in the second quarter.
"Certainly the fourth quarter is not going to be as strong as the third quarter," said Paul Kasriel, chief economist at Northern Trust. "But the important thing is the baton is being passed
from the consumer to the export and capital goods producing sector, and so we're going to have more balanced growth going forward."
Consumer spending, which accounts for two-thirds of GDP, rose at a 6.6% rate in the third quarter, the fastest pace since the first quarter of 1988. Economists note that much of the strength came from mortgage refinancing and tax cuts, which won't be as effective in the current quarter. Kasriel is expecting fourth-quarter GDP growth of 3.8%.
The good news is that U.S. consumers, who carried the economy almost single-handedly over past two years, are finally getting some help from the business world. Corporate spending surged 11.1% in the third quarter, up from the 7.3% rate recorded in the second quarter and the fastest pace since early 2000.
"What's especially encouraging is the acceleration in the growth of equipment and software expenditures," said Kasriel. "I do think we have turned the corner on capital spending, and that's due to stronger profit growth."
Spending on computers and equipment surged 15.4% in the quarter, up from the 8.3% rise in the second quarter. Economists say they were also impressed with a 9.3% rise in exports. Although this number is merely an estimate -- all the data aren't in yet -- the increase shows that a global economic recovery is beginning to take hold.
What's more, inventories contracted in the third quarter, and while that detracted from growth, it is expected to help the economy in the fourth quarter. "If inventories just stopped falling in the fourth quarter, that would add about 1.5% to the growth rate," noted Bill Cheney, chief economist at John Hancock Financial Advisors. "If businesses actually restock the shelves after their third-quarter sales, it would push growth even higher."
Real final sales increased by 7.8% in the quarter. A big sticking point for some economists continues to be the outlook for jobs. "Job growth is the key to a sustained economic expansion," Cheney said. "Productivity growth is terrific, but it's not a panacea. If people are worried about their jobs, or worse, if they're getting laid off, then consumer spending is at risk."
Kasriel said there are already signs that non-auto retail sales have started to slow down. Still, weekly jobless claims have shown some improvement in recent weeks. On Thursday, the Labor Department said initial claims for unemployment benefits fell by 4,750 over the past four weeks to 388,750, the lowest since February.
"The breadth of the gains suggests the expansion is becoming more robust and sustainable," said UBS Warburg economist Maury Harris.
In an environment where consumer spending is likely to slow and business spending likely to pick up further, investors might be tempted to dump retail issues and other consumer-driven stocks and move into the technology sector. The S&P Retail index is already up 44% so far this year. But of course, tech stocks have priced in a lot of good news, too. The
is up 45% since the start of the year.
"The market has already been anticipating this
GDP growth for quite a long time," said Brett Gallagher, head of U.S. equities at Julius Baer. "We've seen the cyclical sectors outperforming by a substantial margin."
Gallagher said consumer spending should decelerate from a very past face in the third quarter, but he said there's no reason to abandon the consumer group at this point. "If you believe jobs growth is going to pick up, then the consumer sector may hold in for a while longer," he said.
As for tech, Gallagher said there's no question it's expensive. "But this market has not at any point in the last five years been based on valuation." Still, Gallagher said that at some point valuations will catch up with the group, and he favors basic materials and machinery stocks.
The GDP report Thursday showed that federal government spending rose just 1.4% in the quarter, after soaring 25.5% in the second quarter. National defense spending was unchanged.
Spending on cars and other durable goods shot up 26.9%, the best in 15 years. Spending on non-durable goods rose 7.9 %, the best in 27 years. Spending on services increased 2.2%. Investments in residences surged 20.4%, due to record low mortgage rates.
Although inflation rose during the quarter, economists said it wasn't cause for alarm, yet. The gross domestic purchases index rose at a 1.9% annual rate after rising 0.4% percent in the second. The core rate rose 1.5% after a 0.8% increase in the second quarter. The
preferred measure of inflation, the personal consumption expenditure index, rose 2.4%, while the core PCE index increased 1.8%.
"Inflation remains far from problematic," said Richard Yamarone, director of economic research at Argus Research. "These increases are far from levels that would compromise economic activity and will not be feared by the
. In fact, we believe that the deflators would have to be above 2.7% before they appear on the Fed's radar screen."