Zero Growth Is a Forecast for Fourth Quarter
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Even as Wall Street bounded higher yesterday on news that the Federal Reserve cut its key lending rate by 25 basis points, and that gross domestic product surged in the third quarter, economists are generally skeptical, predicting growth to slow drastically in the fourth quarter.
“I wouldn’t rule out 0% GDP growth in the fourth quarter,” a managing director and chief economist at the investment bank the Nomura Group, David Resler, said. “Oil prices are at record levels, and if this winter is severe and people are forced to shell out more for home heating, it will take a toll in discretionary consumer spending.” Consumer spending is critical, accounting for just more than 70% of real gross domestic product.
The Department of Commerce reported yesterday that GDP rose at a seasonally adjusted 3.9% annual rate between July and the end of September, pushed ahead by strong consumer spending, nonresidential construction, and exports. The number follows on the heels of a 3.8% GDP increase in the second quarter. Private-sector jobs also posted a strong showing, increasing by 106,000 this month — far surpassing September’s 61,000-job rise, according to payrolls giant Automatic Data Processing Inc. and the consultancy Macroeconomic Advisers.
Adding to the market’s confidence, the Federal Open Market Committee, on a 9–1 vote, cut the federal funds rate — the rate at which banks lend to each other — by 25 basis points, to 4.5%. Last month, the Fed reduced the same rate by 50 basis points for the first time in more than four years.
On news of the rate cut, Wall Street was mixed before ending the day on an up note. The Dow Jones Industrial Average, after first dipping into negative territory, rose 137.54 points, or 1%, to 13,930.01 at close.
Economists say some of yesterday’s numbers are misleading. The third quarter GDP, for example, includes assumptions from the Commerce Department about September numbers that may be too optimistic, critics say. For example, exports grew by 16.2% in the third quarter, although manufacturing jobs have been shrinking.
“They have to make assumptions about September, and it seems to me they made a pretty rosy assumption about export growth,” Mr. Resler, who is officially predicting a fourth quarter GDP rise of 1.7%, said.
“This mini growth spurt apparent in the second quarter and third quarter GDP data is built on a shaky foundation and is not built to last,” the chief economist and director of research at Mission Residential, Richard Moody, said. Mr. Moody, who predicts fourth quarter GDP will increase just 1.2%, cited the strong consumer spending numbers in the third quarter, noting they were based mostly on consumer durables, which were “almost exclusively the function of a one-off jump in auto sales in August.”
With so much skepticism about the GDP number, economists welcomed yesterday’s news of the Fed rate cut, hoping it would slow an economic downturn.
“Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy,” the FOMC said in a statement. It added that following yesterday’s rate cut, “the upside risks to inflation roughly balance the downside risks to growth.” The FOMC’s statements could infer that future rate cuts may be in doubt, analysts predicted.
Some economists took yesterday’s rate cut and GDP results as a good sign.
“A lot of people are ignoring all the scary news out there and are continuing to buy goods and build,” the chief economist at the Associated General Contractors of America, Kenneth Simonson, said. He said he remains bullish on the economy, noting that nonresidential structures, or buildings constructed by businesses, grew 12% in the third quarter, the eighth straight quarter the number has outpaced GDP. “It is the first time since the 1950s that we have seen such a long string of growth,” he said.
Mr. Simonson, however, is in the minority. A visiting scholar at the American Enterprise Institute, Dr. John Makin, predicts overall economic growth will stay at 2%. As such, he expects there will be 0% GDP growth next quarter to offset this quarter’s strength.
“The higher the third quarter GDP number, the lower the fourth quarter number will be,” he said.