WRAPUP 1-U.S. growth seen up in Q3, but still slack

* Third-quarter growth seen edging up to 2.0 percent pace

* Consumer spending likely strongest since recession ended

* Smaller trade gap seen, government spending a wild card

By Lucia Mutikani

WASHINGTON, Oct 29 (BestGrowthStock) – U.S. economic growth likely
edged up in the third quarter but not enough to chip away at
high unemployment or change perceptions of more monetary easing
from the Federal Reserve next week.

A government report on Friday is expected to show gross
domestic product expanded at a 2.0 percent annual rate as
consumer spending accelerated and the trade deficit narrowed,
compared with a 1.7 percent pace in the second quarter,
according to a Reuters survey.

“Growth is still positive, but a bit disappointing. It’s
not where we would like it to be at this point of the
recovery,” said Scott Brown, chief economist at Raymond James &
Associates in St. Petersburg, Florida.

The GDP report will probably not dissuade Fed officials at
their Nov. 2-3 meeting from announcing a second round of bond
purchases next week to push interest rates down further and
energize the recovery. But it is likely to color their debate.

Analysts expect the Fed to announce bond purchases of at
least $100 billion a month to push borrowing costs lower and
spur businesses to expand investment and hiring.

The economy is experiencing a slow recovery by historical
standards, with unemployment at 9.6 percent and Americans
increasingly nervous about the future.

That is expected to shift the country’s political landscape
in Tuesday’s congressional elections, seen as a vote on
President Barack Obama’s performance on the economy. His
Democratic party is expected to suffer big losses.

The U.S. central bank cut overnight interest rates to near
zero in December 2008 and has bought about $1.7 trillion worth
of Treasury and mortgage-related debt since then.

The Commerce Department is to release its advance report on
third-quarter GDP, which measures total goods and services
output within U.S. borders, at 8:30 a.m. (1230 GMT).

HOUSING BOOST MISSING

Economists say a growth pace of at least 3.5 percent,
driven by solid domestic demand and exports, over several
quarters is needed to bring down high unemployment.

“The basic problem is that, in the past the economy has
typically gotten its lift from consumers buying houses. We are
not going to see that in this cycle,” said Steve Blitz, a
senior economist at ITG Investment Research in New York.

“In the past when you had a recession you had delayed
consumption. That’s not there now for a variety of reasons and
this is what is deleveraging of the economy is about.”

Confronted with an uncertain economic outlook, consumers
have cut back on spending in favor of reducing their debt
burden. Households are spending again, but at nowhere near the
levels seen before the 2007-09 recession.

A pick-up in consumer spending is expected to have given
the economy a lift in the last quarter. Third-quarter growth in
consumer spending, which accounts for 70 percent of U.S.
economic activity, is expected to have been the strongest since
the recovery started in the second half of last year.

Output is also seen supported by a narrowing of the trade
deficit, after it sliced off 3.5 percentage points from
second-quarter GDP.

Economists believe the surge in imports in the second
quarter was likely the result of Chinese exporters rushing to
push through goods before the expiration of value added tax
rebates.

The continued rebuilding of inventories by businesses,
though now at a slower pace, also likely lent a hand, but this
could be at the expense of fourth-quarter growth.

Although business spending probably continued to expand in
the July-September quarter, the pace likely slowed from the
prior period, with notable moderation in investment in
equipment and software after three quarters of robust growth.

“Weak investment spending will be offset by a decent gain
in consumer spending. This suggests that consumers are
responding to the modest gains in disposable income, albeit
only gradually,” wrote economists at Bank of America Merrill
Lynch in New York.

Residential construction likely contracted in the last
quarter, reflecting the end of a tax credit for home buyers.

Government spending probably made a modest contribution to
growth. Investment by state and local governments is expected
to have dropped in the third quarter after rising in the prior
period.

The report is also expected to show that inflation
pressures remained muted in the third quarter, underscoring the
Fed’s discomfort with the current disinflationary environment.
(Reporting by Lucia Mutikani; Editing by Dan Grebler)

WRAPUP 1-U.S. growth seen up in Q3, but still slack