PREVIEW-US 3rd-qtr GDP seen +2.0 pct, final sales +1.2 pct

WHAT: First reading on U.S. third-quarter GDP

WHEN: Friday, Oct. 29 at 8:30 a.m. (1230 GMT)

REUTERS FORECASTS

REAL GDP FINAL SALES CORE PCE PRICES

Annual rate Annual rate Annual rate

Median +2.0 pct +1.2 pct +1.0 pct

Minimum +1.0 pct +0.6 pct +0.9 pct

Maximum +3.6 pct +2.1 pct +1.2 pct

Prior +1.7 pct +0.9 pct +1.0 pct

FACTORS TO WATCH

U.S. economic growth probably picked up modestly in the
third quarter, lifted by an acceleration in consumer spending,
but activity remained too subdued to alter views of further
monetary stimulus at the Federal Reserve’s Nov. 2-3 meeting.

Details of the report, however, could help to determine the
size of the second round of Fed’s so-called quantitative easing
program. The Fed has already bought about $1.7 trillion in
bonds to stimulate the economy.

The report will be released shortly before the Nov. 2
congressional elections, viewed as a gauge of President Barack
Obama’s handling of the economy. Any upside surprise will be
little comfort for Democrats, expected to suffer huge losses.

Growth in consumer spending in the third quarter was likely
the strongest since the recovery from the worst recession in
seven decades started in the second half of 2009.

Consumer spending, which accounts for 70 percent of U.S.
economic activity, has been hampered by a 9.6 percent
unemployment rate.

Growth in the third quarter also was seen supported by the
continued rebuilding of inventories by businesses, though the
pace of restocking is fading after peaking in the fourth
quarter of 2009.

Business investment in equipment and software likely slowed
down after three straight quarters of robust growth, leading to
a smaller contribution to growth than in the prior quarters.

Part of the increase in consumer spending was probably
satisfied by imports, which should outpace the growth in
exports, leading to a trade deficit that would be drag on GDP,
although not anywhere near the 3.5-percentage-point subtraction
in the second quarter.

The major wild card to the expected tick up in gross
domestic product growth is government activity, particularly
cash-strapped state and local governments, which purged 83,000
workers in September.

Consumption and investment outlays by state and local
governments grew in the second quarter for the first time in a
year. Another drag on growth probably came from residential
construction, which likely contracted after the end of a
popular home-buyer tax credit.

Inflation pressures probably remained muted in the third
quarter, underscoring the Fed’s discomfort with the current
disinflationary environment.

The personal consumption expenditures price index,
excluding food and energy, likely rose at an annual rate of 1
percent in the third quarter, well below the Fed’s comfort zone
for inflation. The index increased at 1 percent rate in the
second quarter.

MARKET REACTION

U.S. financial markets have largely priced in further
monetary stimulus from the Fed at next week’s meeting and the
debate is now on the size of asset purchases.

A stronger-than-expected reading on GDP would reduce
expectations of hefty bond purchases from the Fed and exert
selling pressure on U.S. government debt. Treasury debt traders
also will keep an eye on the core PCE price readings for signs
of whether deflation is a real threat.

Speculation of sizable bond purchases has weighed on the
U.S. dollar and a stronger GDP number could ease some pressure
on the currency. An in-line or weaker-than-expected reading
could renew pressure on the greenback, though any downside
would be limited given markets have fully priced in the
prospect of significant quantitative easing.

The euro is facing significant resistance at $1.40, with
the range of $1.3650 to $1.4150 likely to hold until the Fed
meeting. Dollar/yen continues to push towards its record low of
79.75, though investors remain wary of the risk of yen-selling
intervention by Japanese authorities.
(Polling by Bangalore unit)
(Reporting by Lucia Mutikani; Additional reporting by Richard
Leong and Wanfeng Zhou in New York; Editing by Neil
Stempleman)

PREVIEW-US 3rd-qtr GDP seen +2.0 pct, final sales +1.2 pct