The acceleration in growth in the third quarter to an annualized 2.5% largely reflects higher momentum in business investment and consumer spending. Against the backdrop of a steep slide in consumer sentiment in recent months, the latter comes as a positive surprise. And, for the first time in a year, government spending was not a drag on growth.
Overall, the latest trend in key economic indicators, such as incoming capital goods orders, first-time jobless benefit claims and survey results in the manufacturing sector, points to continued growth in the current quarter. As things stand, we expect the pace of growth to flatten off somewhat compared with the third quarter. For one thing, the appreciable drop in the private household savings rate is unlikely to prove lasting. Secondly, given the ongoing austerity drives at state and municipal level, further stabilization in government spending looks unlikely. However, looking at the current numbers, there is also potential for a better-than-expected outcome: given the low level of inventories in relation to final sales, the inventory cycle could suprise on the upside.
Nonetheless, uncertainty about what lies ahead will remain high for the time being, above all because the direction of fiscal policy is still unclear. Decisions are still pending on which elements of the “American Jobs Act” proposed by the Obama administration will be implemented. As a result, the scale of the federal budget squeeze next year remains uncertain.