Growth Driven by U.S. Factories as Spending Slows, Survey Shows

By Shobhana Chandra and Kristy Scheuble

Nov. 10 (Bloomberg) -- Economic growth in the U.S. will be stronger over coming quarters than previously anticipated as manufacturing, business spending and exports pick up while consumers cool off, a monthly economists’ survey indicated.

The world’s largest economy will expand at a 3 percent annual rate in the last three months of the year, compared with the 2.4 percent estimated last month, according to the median of 64 forecasts in the Bloomberg News survey. The jobless rate is projected to exceed 10 percent through the first half of 2010, giving households reason to be prudent spenders.

“It’s definitely not the consumer who’s going to drive economic growth,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “Businesses are initially going to be very cautious about hiring so consumer spending will be anemic. In its early stages, it won’t feel like much of a recovery.”

Economists surveyed also boosted their gross domestic product forecasts for next year and 2011 as $2 trillion in global government stimulus spurs sales and companies invest in new equipment. Elevated joblessness will prevent Federal Reserve policy makers from raising the interest rate target until their meeting in August 2010 at the earliest.

Short-term interest rates near zero will weigh on the dollar, which yesterday weakened to a 15-month low against the currencies of major U.S. trading partners. It also means stocks will perform better than bonds, said John Herrmann, president of Herrmann Forecasting. The Dow Jones Industrial Average closed at a 13-month high yesterday.

Good for Stocks

“The low rates are phenomenal for stocks, and put more pressure on the dollar,” Herrmann said from Summit, New Jersey. “It’ll push investors out of the cautious environment of Treasury markets and into equities and more risky assets overseas. It’s fueling the global recovery for risk-taking.”

Consumer spending, after putting in its best performance in more than two years in the third quarter, will cool in the last three months of the year and be slow to recover, according to the survey taken from Nov. 2 to Nov.9. Household purchases will grow at a 1.2 percent pace this quarter following the third-quarter’s 3.4 percent gain.

The anticipated increase in spending, which accounts for about 70 percent of the economy, was 1.9 percent for next year and 2.5 percent for 2011, the survey showed. Gains averaged 3 percent over the past two decades.

Job Worries

Mounting concern over job prospects is one reason for waning confidence and restrained spending. Payrolls fell by 190,000 in October, and the jobless rate jumped to 10.2 percent, exceeding the 10 percent mark for the first time since 1983. Pfizer Inc., the world’s biggest drugmaker, and Sprint Nextel Corp., the third-largest U.S. mobile-phone carrier, yesterday announced plans to cut jobs.

“The labor market is moving toward stabilization, but it’s got a long ways to go,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “Prospects for growth have improved, but this is not going to be a recovery that’s going to make anyone feel good. There won’t be much room for discretionary spending on the part of consumers.”

The projected 3.3 percent pace of expansion in the last half of this year pales in comparison to the 7.2 percent gain in the six months after the 1981-82 recession ended, the last time the jobless rate exceeded 10 percent.

Businesses, on the other hand, are gearing up to purchase new equipment and rebuild inventories after slashing stockpiles at a record pace earlier this year. Better-than-estimated profits also bode well for investment, economists said.

Investment Gains

“So much of business investment was put on the back burner, and now projects are coming back on stream,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut. “That’s really going to be the biggest single contributor to growth in the next couple of quarters.”

Cisco Systems Inc.’s John Chambers, one of the first technology leaders to herald the recession two years ago, said he now sees a global economic recovery, fueling a rebound in his company’s sales this quarter. San Jose, California-based Cisco, the biggest maker of network equipment, also trimmed costs in the past year, including a hiring freeze and travel cutbacks.

“The numbers are indicating us being in the early, initial phase of a recovery -- with the U.S. leading the way,” Chambers said in an interview last week, following the release of Cisco’s quarterly results. “The numbers for U.S. enterprise orders were dramatic.”

The survey results also underscore why Fed Chairman Ben S. Bernanke and his colleagues last week reiterated a pledge to keep borrowing costs low for an “extended period.”

“Clearly, the Fed isn’t in any great hurry to move up rates,” said RBS Securities’ Stanley. “The risk they’re working hardest to avoid is a double-dip scenario,” where the economy starts shrinking again, he said.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.netKristy Scheuble in Washington at kmckeaney@bloomberg.net