NEW YORK (CNN/Money) -
Economists have been jacking up their forecasts for third-quarter economic growth, and many now say it may be the strongest number in nearly four years.
The problem is that might not translate into strong jobs growth anytime soon.
Economists, on average, think gross domestic product (GDP) grew at a 5 percent rate in the quarter, according to the latest surveys by Blue Chip Economic Indicators and the Wall Street Journal. Such a rate would be pretty decent -- the fastest pace since the first quarter of 2002, in fact.
But recent reports on international trade and consumer spending have many economists looking for something even faster -- say 6 percent, or maybe even 7 percent, strength not seen since GDP grew at a 7.1 percent pace in the fourth quarter of 1999. GDP is the broadest measure of the nation's economy.
"We are looking at a growth rate somewhere in between 6.5 percent and 7 percent at this point," said Oscar Gonzalez, economist at John Hancock Financial Services in Boston. "I think it's really going to be up there."
The Commerce Department's report last week of a surprising August improvement in the international trade balance was the first report to send economists scrambling for their calculators. Since the trade gap subtracts from overall GDP, the surprise narrowing of that gap in August should help third-quarter GDP.
The department helped out again this week, when it revised upward retail sales figures for July and August. Since consumer spending makes up more than two-thirds of total GDP, the revised data had many economists more firmly convinced third-quarter GDP could be big.
"Seven percent is not an unreasonable estimate for GDP growth," said Kevin Logan, chief market economist at Dresdner Kleinwort Wasserstein. "Retail sales were strong, especially with the revisions. Consumer spending possibly grew 12 percent at an annual rate. That's really charging right along."
Inventories to slow 3Q down
The surprising decline in August business inventories reported by the Commerce Department Thursday could be a sign the third-quarter headline number will be lower than the most optimistic forecasts, since the change in inventories is a component of GDP. But economists were divided about the extent of the damage.
Lehman Brothers senior financial economist Drew Matus, for example, believes the change in inventories could shave nearly a tenth of a percentage point from the third quarter's growth rate -- but his firm is unlikely to budge from its forecast for 6 percent GDP growth in the quarter.
"Given that the risks to our forecast are probably to the upside, even if we take a tenth of a point away [due to inventories], it's probably best to leave the forecast sit [at 6 percent]," Matus said.
What's more, it's possible that businesses will spend the fourth quarter rebuilding inventories depleted in the third quarter, helping to boost fourth-quarter growth.
Some economists thought recent stronger-than-expected reports of manufacturing activity in October in the New York and mid-Atlantic regions could be signs that inventory rebuilding has begun.
"We had unintentional inventory declines in the second and third quarters, which is what you would typically get in a recession," said Citigroup senior economist Steven Wieting. "I think companies will need to build $50 billion per quarter in inventories, even if the demand growth rate is just 3.5 percent."
While other economists are forecasting a steep slowdown in GDP in the fourth quarter -- growth of 4 percent or less, according to the latest Wall Street Journal poll -- Citigroup expects a 5.2 percent growth rate in the third quarter and a 5.1 percent growth rate in the fourth.
Job turnaround could be slower
Of course, the latest recession, the three-year bear market in stocks, the terror attacks, corporate scandals and two wars have made businesses understandably skittish about betting the farm on any big pick-ups in demand.
After learning to run lean and mean in the bad times, many CEOs don't yet seem to have an appetite for big inventory build-ups or hiring sprees, and probably won't develop one any time soon, many economists believe.
"Customers we talk to are saying they're going to respond to increasing demand, but they won't do anything in anticipation of increasing demand," said Sung Won Sohn, chief economist at Wells Fargo & Co. "That's why employment, inventories and manufacturing will move in positive directions, but I don't think it will be anything spectacular."
Most economists agree. They don't see the unemployment rate falling much below its current level of 6.1 percent next year, though layoffs have apparently tapered off, and jobs are beginning to grow again.
The fear, recently expressed by Federal Reserve Governor Ben Bernanke and others, is that the recovery won't feel like a recovery to many consumers, who could be confronting an anemic job market for several more months, at least.
"I don't see future hiring robust enough to alleviate a lot of concern on the part of consumers," said former Fed economist Lara Rhame, now senior economist at Brown Brothers Harriman. "We've stopped shedding jobs, but over the next two quarters, we won't see very much job growth."