U.S.: A Strong Third Quarter--but at the Expense of the Fourth
By James C. Cooper & Kathleen Madigan
BusinessWeek Online
Wednesday September 25, 9:09 am ET
BusinessWeek Magazine: Business Outlook
Surprise! Third-quarter economic growth is turning out to be a lot stronger than most economists had expected in the wake of the summer stock market plunge. Thanks again to the resilience of consumers, fears that the second quarter's paltry 1.1% growth rate was a precursor to a new round of economic stagnation are turning out to be wasted worry.
But don't get too excited just yet. The pattern of this moderate economic recovery remains uneven. Third-quarter growth may well best the 3% average of the past three quarters. But some of this quarter's gains may have been "borrowed" from the fourth quarter, because they were fueled partly by car buyers' positive reaction to 0% financing. So fourth-quarter real gross domestic product growth could dip back below 3%. But growth will remain positive, and fears of a double-dip recession should become passe.
Certainly, the latest data are encouraging for the outlook. August retail sales were unexpectedly good, suggesting that households aren't as gun-shy as the recent dip in confidence might suggest 
Right now, though, the factory sector has hit a dry patch. Industrial production fell 0.3% in August. Factory output alone slipped 0.1%. Although real GDP could be growing three times as fast as it did in the second quarter, factory output probably isn't rising any better than its 3.6% rate of the spring quarter.
WHAT'S HOLDING BACK MANUFACTURING? Three factors are coming into play now, and unfortunately, they may stick around for a while. First, manufacturers are grappling with uncertainty, not just from scandals and war tensions but also over the strength in demand. As a result, factories are still filling orders from inventories rather than ramping up production or hiring new workers. Even as retailers and wholesale distributors built up inventories, factory stockpiles so far this year are down at a 4.4% annual rate.
Second, most capital-spending projects remain on hold, another offshoot of the uncertainty hanging over the uneven recovery. Capital-goods output accounts for about 13% of industrial production, less than half of the share for consumer products, but it is far more volatile. A boom in capital spending adds greatly to total output.
That's not happening now. Output of business equipment fell 0.3% in July and 0.4% in August. Demand has been hurt by the problems at the airlines, the telecom bust, and overcapacity in many industries. Factories themselves are using only 74.4% of their facilities. But until business investment turns the corner, factory output won't show any signs of acceleration.
The third drag on manufacturing is the influx of imports  biz.yahoo.com |
