GDP forecast: Growing faster, but not for long

@CNNMoney October 24, 2011: 4:18 PM ET
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NEW YORK (CNNMoney) -- Economists are a little more optimistic about the nation's economic health, but they don't think the sputtering U.S. recovery is out of the woods.

In a CNNMoney survey, 21 top economists are forecasting that gross domestic product, the broadest measure of a country's economic activity, rose at an annual rate of 2.5% in the third quarter, after adjusting for inflation.

The government's initial report on third-quarter GDP is due out Thursday.

Only a month ago, the economists had been forecasting only 1.9% growth in the period.

If the new forecasts are right, the recovery has regained much of the strength it lost earlier this year. The economy grew 1.3% in the second quarter and a mere 0.4% in the first quarter.

The higher forecasts are driven by a recent spate of reports on retail sales, business investment and exports that were better than expected.

But while most economists have raised their third-quarter estimates, they have stayed cautious on growth in the fourth quarter and into 2012. And they still fear there's a one-in-three chance of a new recession taking hold in the next six months, particularly if the U.S. economy is hit with the shocks of a financial meltdown caused by the European sovereign debt woes.

"While there is a lot of surprising strength in the third-quarter readings, there's nothing that makes you think we're in a sustained run," said Paul Ashworth, chief U.S. economist for Capital Economics.

While Ashworth is forecasting a 3.2% growth rate for the third quarter, he expects only 1.5% growth in the last three months of this year and throughout 2012.

Overall, the economists surveyed are a touch more optimistic, but agree that the economy is likely to slow again after the third-quarter bump. They forecast a 2.2% annual growth rate in the fourth quarter, and only 2.3% growth from that quarter through the end of 2012.

Even the 2.5% growth expected for the third quarter is considered weak -- it just looks good compared to the first half of 2011. Typically, growth of at least 3% or better is seen as necessary to make a significant improvement in U.S. labor markets.

The continued softness in hiring, income and housing are the reasons that many economists remain cautious about growth going forward.

"Every now and then we get a burst of spending," said Sean Snaith, economics professor at the University of Central Florida. "But the damage that was done to the economy during the recession was pretty significant. We're still dealing with a lot of downward pressures, such as the loss of wealth in the housing market and a labor market that continues to languish."

Still, economists say the fear that a new recession is imminent has greatly abated in recent weeks.

"Back in August and early September, there was a real concern that economy might go into freefall," said Joseph LaVorgna, chief U.S. economist for Deutsche Bank. "There were a lot of things people had to react to -- the debt ceiling debate, the downgrade, fears about default in Europe -- that could have the markets seize up. Fortunately that hasn't happened."

Deutsche Bank is forecasting 2.7% growth in the third quarter, but only 2.2% growth in the fourth quarter and 2.3% in 2012. To top of page

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