/www.bloomberg.com/ By Carlos Torres
Washington, Nov. 26 (Bloomberg) -- U.S. economic growth accelerated to a 4 percent rate in the third quarter, the government said, as consumer spending probably peaked for the year and companies fattened inventories. Since then, the recovery dwindled to about half that pace, economists said.
Gross domestic product increased from the second quarter's 1.3 percent rate and exceeded the Commerce Department's earlier estimate of 3.1 percent expansion. Consumer confidence rebounded in November from a nine-year low, the first increase in six months, the Conference Board said.
The strongest consumer spending this year accounted for three- fourths of last quarter's increase in gross domestic product, the value of all goods and services produced. Stocks fell and Treasury securities rose as investors bet the pace won't be sustained.
The recovery has been ``very stop-and-go,'' said Stephen Stanley, senior economist at RBS Greenwich Capital and one of the nine forecasters who accurately predicted the 4 percent growth rate in a Bloomberg News survey of 51 economists. Companies and consumers have ``never felt comfortable in this recovery. You're always worried that the next pothole in the road is going to derail you.''
A survey by the National Association for Business Economics today shows companies expect the economy to grow more slowly over the next six months than anticipated two months ago. The economy will expand at a 1.4 percent annual rate instead of previously predicted 2.7 percent this quarter and at 2.5 percent instead of 3.3 percent in next year's first three months, the survey said.
Market Reaction
Stocks fell partly because consumer confidence didn't rise as much as economists had forecast. The Standard & Poor's 500 Index lost 20 points, or 2.1 percent, at 4:06 p.m. New York time, while the Dow Jones Industrial Average fell 173 points, or 2 percent. The U.S. Treasury's benchmark 4 percent note maturing in November 2012 had its biggest gain in almost three weeks, rising more than 3/4 point and pushing the yield down 10 basis points to 4.07 percent. A basis point is 0.01 percentage point.
Economists had forecast a revised third-quarter growth rate of 3.8 percent, the median in the Bloomberg News survey. In addition to RBS Greenwich Capital's Stanley, eight other economists including John Ryding of Bear, Stearns & Co. and Neal Soss of Credit Suisse First Boston accurately called the 4 percent rate.
The U.S. entered a recession in March 2001 and started expanding in last year's fourth quarter. The economy expanded at a 1.3 percent annual rate in this year's second quarter. The Blue Chip Economic Indicators poll this month estimated the economy is growing at a 1.6 percent annual pace heading into the holidays.
`Yo-Yo Recovery'
``It's a real yo-yo kind of recovery,'' Cary Leahey, senior economist at Deutsche Bank Securities Inc. in New York, told Bloomberg Radio. ``We just haven't been able to build any momentum with back-to-back 3 percent-plus quarters.''
President George W. Bush will offer a new plan to help accelerate the ``bumpy'' U.S. economic recovery that's now under way, Treasury Secretary Paul O'Neill said yesterday.
``There are pockets of growth in the economy but there are areas of concern in the economy, and the president looks forward to working with Congress to address those concerns,'' White House spokesman Ari Fleischer said today.
The higher GDP included the biggest increase in inventories since the fourth quarter of 2000. Companies added inventories at a $15.5 billion annual pace in the third quarter compared with last month's estimate of $1.9 billion. The restocking accounted for 0.45 percentage point of growth during the three months. Stockpiles increased by $4.9 billion in the second quarter.
Inflation
Inventories ``are lean enough that it's going to be very difficult to get a contraction in the economy'' because production will need to keep growing to meet demand, said Steven Wieting, an economist at Salomon Smith Barney Inc. in New York.
Inflation stayed in check. The GDP price deflator, a gauge of inflation tied to the report, rose at a 1 percent annual rate in the third quarter after rising at a 1.2 percent pace from April to June. Adjusted for inflation, GDP totaled $9.484 trillion in the third quarter when measured at an annual rate, up from $9.392 trillion the previous quarter.
Consumer spending, which accounts for more than two-thirds of the economy, grew at a 4.1 percent annual pace last quarter, down from a 4.2 percent estimate last month. The rise, the biggest since the fourth quarter of 2001, was led by a 23.1 percent increase in spending on durable goods such as automobiles. Consumer spending rose at a 1.8 percent pace in the April to June period.
Consumer Confidence
The increase in November's consumer confidence provides further evidence the holiday retailing season may be stronger than economists and executives thought a month ago.
October's revised 79.6 confidence index was the lowest in nine years. November's gain came as consumers' assessments of present conditions and expectations for the next six months increased.
``The rebound in expectations suggests consumers do not expect economic conditions to become worse,'' said Lynn Franco, director of the Conference Board's Consumer Research Center. ``This comeback, combined with yesterday's upbeat forecasts for Christmas spending, signals a brighter holiday spending season than was anticipated only a month ago.''
U.S. consumers are gradually regaining confidence as stock prices recover from 5 1/2 year lows and as job cuts slow. The jump in confidence was the largest since March and may help keep spending from eroding.
Consumer confidence remains subdued in other parts of the world. German business confidence fell to a 10-month low in November, adding to pressure on the European Central Bank to pare interest rates next week.
New Home Sales
In the U.S., the Federal Reserve has cut the benchmark bank overnight lending rate 12 times since January 2001. That has helped drive down mortgage rates and make housing more affordable, underpinning the recovery.
U.S. new homes sold in October at a faster-than-expected annual rate as the lowest mortgage rates in at least three decades kept housing resilient, government figures showed.
Single-family homes sold at a 1.007 million annual pace, down 4.5 percent from a revised record 1.054 million rate in September, the Commerce Department said. Sales will probably total 971,000 this year, surpassing the record of 908,000 sold in 2001, according to statistics compiled by Bloomberg News.
``Sales at this rate will ensure that the pace of homebuilding will increase in the fourth quarter, so housing will make a modest positive contribution to fourth-quarter growth,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York.
October new home sales were forecast to fall to 990,000 homes at an annual rate from September's previously reported pace of 1.021 million, according to the median of 45 forecasts in a Bloomberg News survey. New homes account for 15 percent of all home sales.
Home prices have increased, giving consumers greater confidence to spend on home furnishings. Centex Corp. and D.R. Horton Inc. are among builders raising profit forecasts.