Economists raise forecasts for fourth quarter U.S. growth--and here's why

11/18/2011 2:42 pm EST


Jim Jubak

Founder and Editor,

Economists continue to increase their projections for U.S. economic growth in the fourth quarter of 2011 as evidence keeps piling up that, despite the euro debt crisis, the U.S. economy will end the year in better shape than anyone expected this summer.

The latest positive indicator comes from this morning’s release of the Conference Board’s Index of Leading Economic Indicators. The index climbed 0.9% in October. That’s the biggest jump since February. Economists surveyed by had expected the index to rise 0.6%.

And that has contributed to another round of higher forecasts from economists. JPMorgan Chase, for example, has raised its forecast of fourth quarter U.S. growth to 3% from a previous projection of 2.5%. Morgan Stanley has upped its forecast to 3.5% from 3%. Macroeconomic Advisers has bumped its forecast to 3.2% from 2.9%.

Contrary to its name, the Index of Leading Indicators actually includes very few leading indicators. Usually, seven out of the 10 components of the index are known prior to the release—the exceptions being manufacturing orders for consumer goods, manufacturing orders for capital equipment, and money supply as measured by M2. This morning’s surprise, however, was almost entirely a reflection of a timing issue in the data on U.S. building permits. According to, the actual number of permits was released after economists had made their predictions based on the forecast for building permits. Actual permit growth, released only yesterday, was much stronger than forecast at 10.8% versus 1.5%.

Without that timing factor, the Index of Leading Economic Indicators would still have climbed but the gain wouldn’t have been a surprise.

Why is U.S. economic growth accelerating when the EuroZone is in a crisis that is pointing to a recession in 2012 (for those countries that aren’t already in recession)? It doesn’t seem logical, I’ll grant you.

But it’s largely a function of the very small U.S. dependence on exports. While exports account for 29% GDP in China (2010 World Bank data) and 41% of GDP in Germany (2009 World Bank data), they make up just 11% of U.S. GDP (2009 World Bank data.) U.S. economic growth depends far more on spending by U.S. consumers, which from the latest retail sales numbers is holding up extremely well.

Better than expected growth in the fourth quarter doesn’t by any means say that 2012 will be equally strong. Stimulus measures, such as a 2 percentage point cut in Social Security payroll taxes, put into place during the 2010 Lame Duck session of Congress are set to expire at the end of 2011.The deepening euro debt crisis could wind up hitting the U.S. economy if it sucks in U.S. banks. And the inability of the Super Committee to come up with a deal to cut the U.S. budget deficit could undermine consumer and business confidence in 2012.

In the meantime, though, and even if only for the short-term, the U.S. economy is looking better than expected.

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