Better-than-expected economic growth numbers from the government were spotlighted on the campaign trail Friday, yet economists fretted that a looming congressional showdown over taxes and spending may already be hurting the economy.
The U.S. economy accelerated from July to September, growing an annualized rate of 2 percent, the Commerce Department said in a report that slightly exceeded expectations.
After growing at just 1.3 percent in the second quarter, the economy sped up in the subsequent three months, beating analysts' expectations of a 1.8 percent third-quarter rate of growth in the gross domestic product, the broadest measure of U.S. trade in goods and services.
This number, coming less than two weeks before the presidential election, allowed the Obama administration to push its narrative that things are getting better.
"Over the last 13 quarters, the economy has expanded by 7.2 percent overall, and the private (sector) components of GDP have grown by 10.1 percent. While we have more work to do, together with other economic indicators, this report provides further evidence that the economy is moving in the right direction," Alan Krueger, the head of the White House Council of Economic Advisers, said in a statement.
If the glass was half full for the administration, Republican presidential candidate Mitt Romney saw a glass half-empty.
"Slow economic growth means slow job growth and declining take-home pay. This is what four years of President Obama's policies have produced. Americans are ready for change: for growth, for jobs, for higher take-home pay," Romney said in a statement shortly after the U.S. Bureau of Economic Analysis released the growth data.
While the third-quarter growth numbers were an improvement, economists warned that they might prove ephemeral, in part because government spending, mostly by the Defense Department, accounted for a third of the growth during the period.
"It's clearly not sustainable," said Scott Hoyt, senior director for forecaster Moody's Analytics. "The trend, particularly as we cross into the new year, is for government spending to be falling, not rising. This is clearly something that won't continue."
Friday's numbers also highlighted a confounding trend: Personal consumption was another big driver of the third-quarter growth, while business investment dragged against it. That reflects contradicting views in polls of sentiment.
On Friday, the University of Michigan/Thomson Reuters survey of consumer sentiment hit a five-year high, with consumers registering their most upbeat view since September 2007, months before the start of what's now called the Great Recession. But surveys from the Business Roundtable, the National Federation of Independent Business and other sources find executives and corporate decision-makers decidedly downbeat.
"Businesses understand the potential implications of the looming fiscal cliff, and consumers seem oblivious," Hoyt said. "We're seeing that in both the confidence figures and spending actions."
The drop across a range of business spending in Friday's growth data, particularly on inventories, suggests that the unresolved "fiscal cliff" - planned tax increases and deep cuts in federal spending if Congress can't reach a compromise late this year - already is harming the economy. Businesses expect things to get worse before they get better.
"The corporate sector is cautious. Equipment and software spending was flat in (the third quarter), after expanding at a 5.1 percent rate in the first half. This was the weakest quarter we've seen since the recovery started in mid-2009," Neil Dutta, the head of economics at Renaissance Macro Research, said in a note to investors. "Capital spending responds to an accelerator effect; thus, with expectations around future growth receding, the corporate sector is holding back. With the year-end fiscal cliff approaching, firms are holding back on committing to longer-lived durable assets."
The "fiscal cliff" involves Bush-era income tax cuts that are set to expire at the end of this year, reverting to Clinton-era tax brackets. Also expiring is a break on what employees contribute in payroll taxes. Tax increases during a slow-growth period weigh against a robust recovery.
Also, absent a budget deal, deep mandatory cuts in spending across the federal government, including defense and national security, are set to take hold next year. And by late February or March, the government is expected to bump up against a debt ceiling and will have to reach a new accord with Congress in order to borrow more to pay existing obligations. All these things fall together under the term "fiscal cliff."
"The economy simply does not have enough momentum to absorb the shock from going over the fiscal cliff without going into recession in 2013," Dutta warned.
In what's become blood sport in Washington, politicians blamed each other Friday for the looming fiscal cliff.
"President Obama's 'Fiscal Cliff' Already 'Wiping Out' Jobs," read the headline of a statement issued by House Speaker John Boehner, R-Ohio.
Friday's numbers put meat on the bones of what had been anecdotal evidence of a pullback by businesses. The National Association of Manufacturers issued a report Friday that suggested the uncertainty already has cost the economy 1 million jobs.
Should a compromise not be reached during the lame-duck session of Congress in November and December, the implications for the economy are grave. Analysts expect the final months of this year to remain sluggish.
"We see little prospect for improvement in the current quarter, with the major components likely to maintain (third-quarter) trends," Alan Levenson, the chief economist with investment giant T. Rowe Price, said in a research note.
There were some positives in Friday's numbers. For the first time in quite a while, housing added to growth rather than subtracted from it. Investment in residential housing leapt up at a rate of 14.4 percent in the three-month period, rising from an 8.5 percent rate in the second quarter of this year. That's a plus for growth, but housing today represents a smaller share of overall growth, so its impact on the broader growth numbers is subdued.
Spending on personal consumption rose by 2 percent in the three-month period, driven in large measure by a return of the consumer. Spending on goods rose at a rate of 4.4 percent, and spending on services rose at a rate of 0.8 percent. Spending on durable goods, big-ticket items such as cars and refrigerators, rose by 8.5 percent.
"Stronger spending on consumer goods, housing and defense were positives that lifted our economy from the weak 1.3 percent growth rate of the second quarter. Yet the impact of head winds on the global and domestic economy cannot be minimized, as business investment was flat or falling and goods exports were down," Chad Moutray, the chief economist for the National Association of Manufacturers, wrote in his blog Friday. "It is clear that manufacturers are feeling the impact and uncertainty about the future direction of the economy is hampering growth."
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