Consumer spending and home building gains boosted U.S. economic growth, which was also propelled by a consumer confidence level which reached a five-year high in October. The Commerce Department reported gross domestic product increased 2 percent in the third quarter, after a rise of just 1.3 percent in the second quarter. The growth exceeded Bloomberg economists’ median forecast of just 1.8 percent.
“We are encouraged by the improvement we’re seeing in consumer spending and housing,” Dean Maki, chief U.S. economist in New York for Barclays Plc, who correctly forecast the rate of growth, told Bloomberg. “These will be dominant themes in the fourth quarter too.”
According to the Bureau of Economic Analysis, which released the Commerce Department’s report, the GDP increase can be attributed to positive personal consumption expenditures, federal government spending and residential investment. It was offset, however, by exports, nonresidential investment and private inventory investment. Imports, however, declined for the quarter, which attributed to the GDP growth.
“The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment,” the Bureau noted in its report.
Consumer purchases account for about 70 percent of the GDP, and grew about 2 percent in the third quarter, compared to just 1.5 percent in the second quarter. According to Bloomberg, purchases added about 1.4 percentage points to total economic growth. Based strictly on data, it appears after several years of purchasing less and paying existing debt, consumers are prepared to borrow and buy again.
“Consumers are feeling wealthier so they are still out there spending,” Joshua Dennerlein, an economist with Bank of America Merrill Lynch, told the New York Times.
Hindering further economic growth, however, is a slowdown in business investment, which fell 1.3 percent in the third quarter after a 3.6-percent increase in the second quarter. With the looming “fiscal cliff” nearing and Congress at a standstill until after the election, businesses are warily holding on to their capital.
“Executives don’t know what the future will hold, so they’re sitting on their hands,” Scott Anderson, chief economist at Bank of the West in San Francisco, who correctly forecast third-quarter growth, told Bloomberg. “We’re seeing strength in areas that have been lagging, such as consumer spending and housing, while business investment is extremely weak.”
Still, consumer spending is less than it was prior to the Great Recession, when high home prices and easy credit boosted consumer sentiment and growth exceeded 3 percent. And economist Nigel Gault warns the outcome of the fiscal cliff could easily eliminate any economic growth recent consumer attitudes have allowed.
“We’d really be in trouble if consumer attitudes were deteriorating like business attitudes,” Gault, chief United States economist for IHS Global Insight, told the Times. “Consumers are not so forward-looking as businesses. So there are two ways this can go. Either we clear up the uncertainty, or consumers start focusing on the fiscal cliff, and we see consumer spending hurt as well.”