Economy Preview: Growth May Slow After Third-Quarter Rebound

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The American economy accelerated in the third quarter as consumers rediscovered a penchant to spend, economists forecast the government to report this week. Growth may cool this quarter as rising energy prices sap buying power.


The economy probably expanded at a 4.3% annual pace from July through September after a 3.3% rate in the previous three months, according to the median estimate of economists surveyed by Bloomberg News ahead of an October 29 Commerce Department report. Consumer spending probably grew 4.7%, the most in a year and almost triple the previous quarter’s pace, the survey showed.


Crude and heating oil costs this month reached records and gasoline prices approached the highest ever. October measures of consumer confidence and business activity in the Chicago region may drop as a result, other reports this week are likely to show. With confidence shaken and energy bills rising, consumers may spend less on other goods and services, depriving the economy of a source of strength, economists said.


“We are in a completely different environment now than we were in the third quarter,” said the chief economist at Daiwa Securities America Inc. in New York, Michael Moran. “We are seeing an element of caution emerge again on the part of businesses and you are very soon going to start to see slower consumer spending because of what is happening on the energy front.”


Mr. Moran tentatively forecast the economy would grow at a 3.3% annual pace from October through December and expand 3% in the first three months of 2005. He projected the world’s largest economy grew at a 4.5% rate last quarter.


Economists surveyed from October 1 to October 11 forecast the economy would grow 3.8% this quarter and 3.6% the next.


President Bush may try to use the third-quarter growth data to blunt criticism from four-term Senator Kerry, the Democratic challenger, who says administration policies have failed to create jobs. The growth estimate will be reported four days before the election.


Faced with too many unsold 2004 models, General Motors Corp., Ford Motor Co., and other automakers sweetened discounts to attract buyers in September. General Motors boosted incentives by 6.1% to $5,168 and Ford increased them by 5.6% to $5,179, according to CNW Marketing Research, an industry group.


The gambit worked as sales of cars and light trucks jumped to 17.5 million vehicles at an annual rate, a 5.4% increase from August, according to industry figures released October 1. Auto sales last quarter were the strongest in a year.


The jump in car sales helped consumer spending, which accounts for more than two-thirds of the economy, rebound from a 1.6% pace in the second quarter that was the weakest since the 2001 recession.


Price increases on all goods and services probably slowed last quarter and may have encouraged more spending. A measure of prices tied to the Commerce report probably rose at a 1.6% annual pace, half the second quarter’s 3.2% increase, according to the median estimate of economists.


Business investment kept the economy afloat in the second quarter when consumer spending faltered. It probably continued to underpin growth from July through September. Orders for durable goods, items like computers and machinery that are meant to last three years or more, probably rose 0.5% last month, reversing August’s decline, according to the median estimate. The report is due from Commerce on October 27.


Shipments of nonmilitary capital goods excluding civilian aircraft, a figure the government uses to calculate business investment, rose at a 12.4% annualized rate in the three months ended in August. Corporate spending on new equipment and software rose at a 14.2% annual pace in the second quarter and accounted for a third of the economy’s growth.


Since then, energy prices have climbed, threatening the outlook for consumer and business spending this quarter. Crude oil futures for December delivery rose to a record $55.45 a barrel last week. Oil has increased 70% so far this year.


The effect of high energy prices may be slower “growth in consumer spending,” said William Hernandez, chief financial officer at PPG Industries Inc. the world’s second-biggest maker of car paint, in an interview last week. The impact is “not one that leads to recession.”


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