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On U.S. Growth, Economists Rein in Estimates

The Exchange

Worrisome spending trends and the effects of the superstorm that has devastated the mid-Atlantic region are among the factors that are leading some economists, with only weeks remaining in 2012,  to downgrade their estimates for fourth-quarter U.S. growth.

Individually, the impact of Sandy, the election, the fiscal cliff, business spending and how consumers are approaching the holiday season is difficult to discern. But each new economic report is offering an additional pixel to the big picture.

The U.S. government reported last week that the nation's economy grew at an annualized rate of 2.7% in the third quarter, up from a previously reported 2%. However, a buildup in inventories and a notable downward revision to consumer spending kept the excitement in check.

[Read More: GDP Improves for All the Wrong Reasons]

JPMorgan chief U.S. economist Michael Feroli revised lower his expectation for fourth-quarter growth by half a percentage point -- to 1.5% annualized growth, from 2% -- late last week following that report. Three factors figured heavily in his decision: The above-mentioned greater-than-expected inventory build-up, softer personal income figures and weak demand data at the beginning of the fourth quarter. He's looking for growth at an annualized rate of just 1% in the first quarter of 2013.

Tom Porcelli, chief U.S. economist at RBC Capital Markets, cut his fourth-quarter GDP estimate even more sharply to 0.2% from 1%. "But here's the real risk: that Sandy had enough of an impact early in November to offset what seems to be an OK start to the holiday shopping season," he writes in a research report. "If November spending is soft as a result of that, seeing a negative sign in front of Q4 GDP is nontrivial, to say the least."

Sandy swept the East Coast during election week, causing tens of billions of dollars of damage and leaving millions without power -- some for days, others for much longer. The continuing cleanup is expected to take months, and in some areas, years.  And the immediate negative effect on the economy is not to be overlooked. On the other hand, the repair is expected to stimulate construction and potentially the auto sector in the long and short term, respectively.

"We do expect some repair and rebuilding efforts will support activity data after October, and we anticipate, for instance, that auto sales in November will benefit from replacement purchases," wrote JPMorgan economists in a note Friday. But on balance, JPMorgan expects that Sandy may be responsible for lowering fourth-quarter growth by a few tenths of a percent.

Weak U.S. economic growth, particularly in the form of jobs, was hotly debated in the weeks leading to the election, prior to Sandy and the intense focus on the fiscal cliff. Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, told The Daily Ticker last week that he believes the U.S. economy turned downward beginning in July. "The evidence is starting to mount that a recession is already underway, and we're a few months into it," he says.

[Read More: Ignore GDP and the Fiscal Cliff, U.S. Is Already in a Recession: ECRI's Achuthan]

The economic conversation in recent weeks has been dominated by uncertainty revolving around the impending fiscal cliff and its impact or lack thereof. But attention will shift back this week to any new conclusions that can be drawn from the November jobs report. The expectations reflect a dramatic decline in jobs growth. Economists on average are looking for jobs growth of just 90,000 in November, down from 171,000 in October, according to Briefing.com estimates. The jobless rate is expected to budge barely higher, to 8% from 7.9%.

Here are a few other things to watch for ahead of Friday's jobs report:

  • Wednesday: ADP private sector jobs report, productivity data, factory orders and the ISM services index.
  • Thursday: The Challenger report on job cuts and weekly initial jobless claims.

What do you think is the biggest factor affecting the economy right now? Let us know in the comment section below.