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Superstorm, 'cliff' could put brakes on GDP growth

Published November 29, 2012 8:46 pm

Outlook • U.S. economy's output revised up to 2.7 percent in Q3.
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Washington • The U.S. economy grew at a 2.7 percent annual rate from July through September, much faster than first thought. The strength is expected to fade in the final months of the year because of the impacts of Superstorm Sandy and uncertainty about looming tax increases and government spending cuts.

The Commerce Department said Thursday that growth in the third quarter was significantly better than the 2 percent rate estimated a month ago. And it was more than twice the 1.3 percent rate reported for the April-June quarter.

The key driver in the upward revision to the gross domestic product was that businesses restocked at a faster pace than previously estimated. That offset weaker consumer spending growth.

GDP measures the nation's total output of goods and services — from restaurant meals and haircuts to airplanes, appliances and highways.

Most economists say economic growth is slowing to below 2 percent in the current October-December quarter. That's generally considered too weak to rapidly lower the unemployment rate.

Paul Ashworth, chief U.S. economist at Capital Economics, said companies probably are restocking more slowly because businesses typically cut back when they think consumers will spend less. Consumer spending drives roughly 70 percent of economic activity.

Economists cite two reasons for the anticipated weakness in consumer and business spending.

Superstorm Sandy halted business activity along the East Coast in late October and November. And spending may weaken in the final weeks of the year, if lawmakers and Obama fail to reach a deal to avoid the "fiscal cliff." That's the name for sharp tax increases and spending cuts that would occur in January without a deal.

Sandy packed a bigger economic punch than most people had thought. The storm halted sales at major retailers at the start of the crucial holiday shopping season offsetting a strong Thanksgiving Day weekend. Retailers such as Kohl's, Target, Macy's and 15 others reported that November sales at stores open at least a year — an indicator of a retailer's health — through last Saturday were up 1.7 percent, compared with the year-ago period. That's well below forecasts of a 4.5 percent to 5.5 percent gain.

The storm also shut down factories in the Philadelphia and New York region and hurt home sales in the Northeast.

Governors in New York and New Jersey have increased their federal aid requests to nearly $80 billion to rebuild in the region. Still, other reports show the U.S. economy outside the storm-affected states is improving. And the rebuilding efforts could give the economy a boost in the New Year.

The GDP report showed continued strength in homebuilding, which rose at an annual rate of 14.2 percent. And government spending expanded at an annual rate 3.5 percent, marking its first positive contribution to overall economic growth in two years. The increase was driven by a big jump in defense spending.

The Labor Department said employers added 171,000 jobs last month and hiring in September and August was stronger than previously thought.