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updated: 11/7/2013 7:49 AM

U.S. economic growth likely slowed in third quarter

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  • A covered vehicle sits in part of the new paint shop at Chrysler's Sterling Heights Assembly Plant in Sterling Heights, Mich.

      A covered vehicle sits in part of the new paint shop at Chrysler's Sterling Heights Assembly Plant in Sterling Heights, Mich.
    Associated Press

 
Associated Press

U.S. economic growth is likely languishing in the second half of 2013, held back by federal policies and a slowdown in hiring that has kept consumers from stepping up spending.

Economists are hopeful that the impact from Washington may soon ease, clearing the way for stronger growth next year.

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Analysts forecast that the economy grew at a 2 percent annual rate in the July-September quarter, according to a survey by Factset. That would be down from an annual rate of 2.5 percent in the April-June period. Most economists expect growth will stay at the tepid 2 percent rate or weaken slightly in the October-December quarter.

The Commerce Department will release its first estimate for third-quarter growth at 8:30 a.m. EST Thursday. It was delayed one week because of the partial government shutdown.

The American consumer showed little enthusiasm for spending this summer. Higher taxes that took effect earlier this year have lowered take-home pay. And low- and middle-income workers' wages are barely keeping pace with inflation. Consumer spending drives roughly 70 percent of economic activity.

Federal spending cuts have also dampened growth. And the 16-day shutdown last month is expected to keep the economy from accelerating in the final three months of the year.

"The winds from government tax and spending actions were blowing very hard in the third quarter," said Mark Zandi, chief economist at Moody's Analytics.

Some areas of the economy performed well over the summer. Homes sales and construction remained robust, despite a rise in mortgage rates. Americans kept buying cars and trucks. And exports of autos and other manufactured goods rose, helped by improving economies overseas.

Still, hiring, a crucial driver of growth, has slowed. The economy added an average 143,000 jobs a month from July through September. That's down from an average of 182,000 in April through June, and 207,000 during the first three months of the year. Without more jobs and hiring pay, consumer spending is likely to remain weak.

The shutdown will not affect third-quarter growth. But many analysts say it could cut more than half a percentage point from growth in the October-December quarter. The shutdown cost the U.S. economy $24 billion, according to Beth Ann Bovino, an economist at Standard & Poor's.

Weaker growth at the end of the year would mean overall growth has slowed from 2012. Many analysts are forecasting growth for the full year of around 1.8 percent, down a full percentage point from last year's 2.8 percent growth.

Many economists expect growth to pick up in 2014, perhaps to as much as 3 percent. The economy should benefit from no additional tax hikes next year, though federal spending is expected to be tightened further. Housing should remain strong and businesses are likely to invest more in new equipment, said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

"Businesses really need to raise productivity and the best way to do that is by employing new technology," Sohn said.

Zandi predicts growth of 3 percent in 2014, which would be the best rate in nine years. But that depends largely on Washington policymakers reaching a deal on the budget, no small feat given the increased partisanship that led to last month's shutdown.

A House-Senate conference committee is trying to strike an agreement that will replace a temporary measure that funds the government through Jan. 15. There is also a need to lift the borrowing limit by Feb. 7.

"My working assumption is that lawmakers will come together and Washington will not derail the recovery," Zandi said.

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