Stronger-than-forecast GDP affirms Fed optimism

The Federal Reserve.

Oct. 30 (Bloomberg) — The U.S. economy expanded more than forecast in the third quarter, validating the optimism that prompted Federal Reserve policy makers to stop pumping money into financial markets.

Gross domestic product grew at a 3.5 percent annualized rate in the three months ended September after a 4.6 percent gain in the second quarter, Commerce Department figures showed today in Washington. It marked the strongest back-to-back readings since the last six months of 2003.

Government outlays and a shrinking trade deficit boosted growth last quarter, buying time for consumer spending in the world’s largest economy to strengthen as fuel prices drop and hiring picks up. Fed officials yesterday cited the improvement in the job market in deciding to end their bond-buying program and stay on course toward interest rate increases next year.

The economy “is on a firm footing, and if the labor market continues to get better, that’s the primary support to consumer spending,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly forecast the growth in GDP. “The demand side of the equation was very healthy in the third quarter.”

The report is the last major economic indicator before next week’s mid-term election, in which Republicans are expected to expand their majority in the House and perhaps net the six seats they need to take control of the Senate.

Mid-Term Election

While the GDP number exceeded forecasts, it may not be enough to alter the political landscape. President Barack Obama’s fellow Democrats have struggled against the headwinds of his underwater approval rating, which has been mired below 45 percent in recent polls, and stagnant wages.

Stocks rose as the faster-than-estimated growth fueled speculation the economy is strong enough to withstand higher interest rates. The Standard & Poor’s 500 Index rose 0.2 percent to 1,985.85 at 12:17 p.m. in New York.

The median forecast of 87 economists surveyed by Bloomberg called for a 3 percent advance in GDP, the value of all goods and services produced. Forecasts ranged from 2.1 percent to 4 percent. Today’s estimate is the first of three for the quarter, with the other releases scheduled for November and December when more information becomes available.

Another report today showed jobless claims rose by 3,000 to 287,000 in the week ended Oct. 25, in line with the median forecast of economists surveyed by Bloomberg, according to Labor Department data. The four-week average, a less volatile measure than the weekly figures, declined to 281,000, the lowest since May 2000.

Fed’s View

The Fed yesterday highlighted “solid” employment gains in its statement announcing the end of the asset-buying program, or quantitative easing, that added $1.66 trillion to its balance sheet. Central bankers made no mention of the recent turmoil in global financial markets and slowdown in world growth.

“Today’s GDP report is consistent with the Fed’s decision to end QE,” said Dana Saporta, a U.S. economist at Credit Suisse Securities USA in New York. “It bears out the Fed’s contention that the U.S. recovery is progressing.”

The second quarter’s 4.6 percent jump was a rebound from a 2.1 percent slump in the first quarter that partly reflected a harsh winter.

Consumer spending, which accounts for almost 70 percent of the economy, climbed at a 1.8 percent pace last quarter after growing at a 2.5 percent rate in the previous three months, today’s report showed.

The gain compared with a 1.9 percent median forecast in the Bloomberg survey. Purchases added 1.2 percentage points to GDP.

Consumer Confidence

Improving consumer sentiment may help lift the biggest part of the economy this quarter. Confidence this month jumped to a seven-year high, according to figures from the Conference Board.

That has companies such as Benton Harbor, Michigan-based Whirlpool Corp. optimistic about their outlooks.

“U.S. appliances demand continued to strengthen in the third quarter,” Marc Bitzer, who oversees North America, Europe, Africa, and the Middle East for Whirlpool, said in an Oct. 28 earnings call. “We continue to see improvements in employment and consumer confidence, which bodes well for all aspects of demand in the U.S.”

Sustained improvement in the job market will be needed to give households the income and the confidence to continue purchases. Payrolls climbed by 248,000 in September and the jobless rate declined to 5.9 percent, the lowest level since July 2008.

The biggest drop in crude prices since the global financial crisis six years ago may also boost GDP, as cheaper fuel gives consumers extra spending money heading into the holiday shopping season. Economists expect growth to hover around 3 percent through the first quarter of 2015.

Government Spending

Government spending climbed at a 4.6 percent pace, the most since the second quarter of 2009, today’s GDP report showed. The pickup reflected a rebound in defense outlays.

The trade gap narrowed to $409.9 billion from $460.4 billion in the second quarter as imports dropped, reflecting fewer purchases of foreign oil and consumer goods. The smaller deficit added 1.3 percentage points to GDP, the most since the second quarter of 2009.

Additional narrowing may be difficult as the slowdown in global growth hurts exports, said Societe Generale’s Jones.

“You have to worry about trade in particular, with the stagnant situation in Europe and potentially slower growth in China,” he said. “You wonder how long we can keep those exports up.”

A report today eased concern about the extent of the European slowdown. Economic sentiment in the 18-nation euro area unexpectedly rose in October, according to data from the European Commission in Brussels. There was also positive news in Germany, Europe’s largest economy, where unemployment unexpectedly fell the most in six months.

–With assistance from Jonathan Allen and Alex Tanzi in Washington.