Consumers, Businesses to Pump up 3Q Growth

Economic growth likely gathered steam in the third quarter as consumers and businesses set aside fears and stepped up spending, creating momentum that is expected to carry into the final three months of the year.

Part of the anticipated increase will come from the reversal of temporary factors that had restrained growth, but it comes as welcome relief for an economy that looked on the brink of recession just weeks ago.

The probability of a double-dip has diminished quite a bit, said Sung Won Sohn, an economics professor at California State University in the Channel Islands.

U.S. gross domestic product expanded at a 2.5 percent annual rate in the third quarter, according to a Reuters survey of economists. That would be a big acceleration from the 1.3 percent pace seen in the April-June quarter.

The government's GDP report will be released at 8:30 a.m. EDT on Thursday.

The peppier spending and a slower pace of inventory accumulation by businesses will lay a base for a solid fourth quarter, but a slowdown in Europe and the exhaustion of pent-up U.S. demand could leave a weak spot early in 2012.

And the recovery's pace is still too weak to lower a jobless rate that has been stuck above 9 percent for five straight months.

VOICING FEARS BUT STILL SPENDING

A jump in gasoline prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan's earthquake had curbed auto production. Motor vehicle output has surged as those supply constraints have eased.

In addition, car sales, which were held back by the lack of popular models, have also shown renewed strength.

As a result, consumer spending, which accounts for about 70 percent of U.S. economic activity, is seen growing at a rate of at least 2 percent after slowing to a 0.7 percent pace in the second quarter, the slowest rate since late 2009.

The relative vigor comes even though consumer confidence has hit levels last seen during the worst of the 2007-09 recession.

Similarly, while some business surveys have pointed to a contraction in factory output, there is little sign corporate America is cutting back spending. Indeed, recent data has suggested business spending is picking up.

Apart from consumer and business spending, growth in the third quarter is seen supported by a smaller U.S. trade deficit, and the careful management of business inventories bodes well for fourth-quarter production.

Businesses have been pretty cautious about building inventories. I don't think there is an overstocking problem, said Won Sohn.

Investment in home building is expected to contribute little or nothing to third-quarter growth, after growing at a 4.2 percent pace in the second quarter, while government spending is expected to be a drag for a fourth straight quarter.

Weak government spending mostly reflects continued budget cuts by state and local governments. Revenues at state governments, however, are improving, according to an independent report on Wednesday.

But stronger spending at the state and local level could be offset by a tighter federal budget in the new year unless lawmakers searching for a deal to cut long-term deficits agree to keep in place payroll tax cuts and an emergency extension of unemployment benefits due to expire at year end.

In the absence of an agreement how to achieve that saving ... there is going to be fiscal contraction next year, which is going to slow the economy down, said Christopher Probyn, chief economist at State Street Global Advisors in Boston.

(Reporting by Lucia Mutikani; Editing by Leslie Adler)