Economy Poised for Growth Spurt, but Risks Abound

The Wall Street Journal

13 December  2011

The U.S. economy is on track to grow faster in the current quarter than any time since the second quarter of last year, though several risks—including a possible meltdown in Europe—are clouding the outlook.

In recent days, a number of economists have increased estimates for fourth-quarter growth, pointing to stronger-than-expected readings on trade, consumer spending and other gauges. Forecasting firm Macroeconomic Advisers on Friday raised its estimate to 3.7%, from 3.5%, while Goldman Sachs has raised its target to 3.4% from the 2.5% it was predicting two weeks ago.

Nomura Global Economics lifted its target from 3.7% to 3.9%, which, if achieved, would match the fastest quarterly growth of the recovery.

This pace of growth is much stronger than economists were expecting a few months ago, when Europe’s sovereign-debt problems started getting worse. A Wall Street Journal survey of economists in October showed they expected growth of just 2% in the fourth quarter. There was good reason for the subdued projection, including a third quarter that sparked little hope of an accelerating economy. Stock-market gyrations earlier this year erased huge amounts of wealth, while weak housing and job markets constrained consumer confidence.

But the economy looks much better now. The stock market has made up much of its losses, although new worries about Europe sent indexes lower Monday, and consumer sentiment has improved, prompting consumers to dip into savings and continue spending. Companies are not only selling more, they’re restocking shelves when they become too lean. Retail sales rose 0.5% in October and were up 7.2% from the same month last year, according to the Commerce Department. Economists surveyed by Dow Jones Newswires estimate another 0.5% gain when November’s retail-sales figures are released Tuesday.

A few months ago, Alan Levenson, chief economist at T. Rowe Price, predicted fourth-quarter growth would come in below 2%—a contrast with his current forecast of 3.5% to 4%.

That updated outlook comes with significant caveats. “My caution is that 3.5% is not the new trend and we’re expecting substantial slowing to below 2% in the beginning of next year,” he said.

Most economists see more reasons for caution than optimism. In the most recent Wall Street Journal survey, conducted in late November and released last week, 92% of economists said the euro zone now is in recession or faces an imminent recession. A number of manufacturing reports suggest growth has slowed in overseas economies including China and Brazil. In addition to a slowing manufacturing sector, China’s cooling real-estate market could damp domestic demand.

Many forecasters also doubt that U.S. consumers can keep spending at their current pace. Home values continue to fall. The personal savings rate, after moving up sharply in the wake of the financial crisis, is heading back down. Americans saved 3.5% of their after-tax income in October, down from 5.2% at the start of the year.

Despite what is shaping up to be a strong fourth quarter, economists surveyed by the Journal said they expect a slowdown in the beginning of next year. They predict growth of 2.1% in the first quarter.