US analysts confident of faster growth

The United States economy may end this year growing at its fastest clip in 18 months as analysts increase their forecasts for the fourth quarter just a few months after a slowdown raised concern among investors.

Economists at JPMorgan Chase in New York now see gross domestic product rising 3 per cent in the final quarter, up from a previous prediction of 2.5 per cent. Macroeconomic Advisers in St Louis increased its forecast to 3.2 per cent from 2.9 per cent at the start of November, while New York-based Morgan Stanley boosted its outlook to 3.5 per cent from 3 per cent.

"The incoming data on consumption, business spending and residential investment all point to GDP growth in the fourth quarter tracking 3.3 per cent," said John Herrmann, senior fixed-income strategist at State Street Global Markets in Boston.

Joseph LaVorgna, chief US economist at Deutsche Bank Securities in New York, said he wouldn't be surprised to see fourth-quarter growth of 4 per cent, though for now he is sticking with his forecast of 3 per cent.

The strengthening economy will help lift US stock prices, which have been depressed by the sovereign debt crisis in Europe, LaVorgna said.

The Standard & Poor's 500 Index rose 0.5 per cent to 1221.98 on Saturday. The benchmark gauge lost 3.8 per cent over the first four days of this week.

"There's too much pessimism built into the market," he said, adding that the Standard & Poor's 500 Index could break 1300 by year's end. The stock gauge closed at 1216.13 on Saturday.

The economic pick-up may push up yields on Treasury securities, Herrmann said. The yield on the 10-year note could rise to 2.25 per cent or higher in the first quarter of next year, he said, assuming Europe avoids a financial catastrophe akin to the 2008 bankruptcy of Lehman Brothers Holdings. The 10-year yield stood at 1.96 per cent on Saturday, according to Bloomberg Bond Trader prices.

Consumers have not cut back on spending even with the turmoil in world financial markets, putting pressure on companies to rebuild inventories they ran down because of concerns about Europe.

Helped by the biggest jump in electronics purchases in two years, retail sales rose 0.5 per cent in October, after a 1.1 per cent increase the month before, the Commerce Department says.

"We feel confident that the momentum we have heading into the fourth quarter, combined with our holiday strategies, bode well for that quarter," said Karen Hoguet, chief financial officer for Macy's, the second-biggest US department-store chain.

"We'll have a spectacular Christmas," she added.

Companies, meanwhile, held their inventories little changed in September as sales climbed, the Commerce Department said last week. Businesses had enough goods on hand to last 1.27 months at September's sales pace, near the record low of 1.24 months reached earlier this year.

The economic outlook beyond the fourth quarter rests heavily on what policy makers do, both in Europe and the US, said Michael Feroli, JPMorgan Chase's chief US economist.

The US would not be able to "escape the consequences of a blow-up in Europe", Federal Reserve chairman Ben Bernanke said this month. "The world's financial markets are highly interconnected."

Federal Reserve Bank of New York President William Dudley said yesterday that while recent economic reports have shown improvement, that shouldn't be a signal for the Fed to relax its efforts to boost the economy.

Growth next year may be around 2.75 per cent after somewhat more than 2.5 per cent in the fourth quarter, he said.

- BLOOMBERG

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