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Friday, October 10, 2003

IS the US Stimulus a Spent Force?

An interesting point emerges from this survey of 53 economists: the short-term stimulus in the US economy may be a spent force. It seems it was considerable while it lasted, but we may expect spending to slow down notably.

A burst of consumer spending fueled by lower taxes and advance refund checks that helped the U.S. economy accelerate last quarter won't be sustained in the final three months of the year, a private survey of economists showed. The world's largest economy probably expanded at a 4.9 percent annual pace from July through September, led by a 5.2 percent jump in consumer spending, according to the consensus estimate of 53 economists surveyed by Blue Chip Economic Indicators this month. Growth will slow to 3.7 percent in the final three months of the year as household spending cools.

Surveys of purchasing managers showing slower growth among both manufacturers including General Electric Co., and service companies last month, concern that consumers have already spent much of the savings from the tax cuts, and a lack of jobs help ``to account for the unwillingness of many panel members to ratchet even higher their estimates of future economic activity,'' the report said. The third quarter ``will give way to much more modest growth in a U.S. economy that has seen little job growth,'' said Jeffrey Rubin, chief economist at CIBC World Markets Inc. in Toronto and a participant in the survey, in an article written for the Blue Chip survey. General Electric Co., the world's second-biggest company by market value, today reported its fourth consecutive quarterly decline in profit, with third-quarter net income falling 11 percent from the same period last year. Northrop Grumman Corp., the world's largest naval shipbuilder, yesterday cut its 2004 sales forecast by at least $300 million because of delays in work on an aircraft.........

The boost from the tax cuts that took effect in July is evident in the forecasts for incomes. Disposable personal income, or the money left over after taxes, probably grew at a 7.9 percent annual rate in the third quarter, according to the survey. Income growth is projected to slow to a 2.3 percent pace in the final three months of the year, less than a third of the previous quarter's pace.

Earnings gains slow as the unemployment rate is projected to average 6.2 percent in the fourth quarter, compared with a 6.1 percent jobless rate in September. Former General Electric Chief Executive Office Jack Welch said on Wednesday the economy would recover more quickly than after past slumps, though it would take longer for jobs to respond. For all of 2003, the economy will expand 2.7 percent, 0.1 percentage point better than estimated last month, the survey showed. GDP grew 2.4 percent last year, the first year of a recovery from the recession that ended in November 2001.
Source: Bloomberg

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