The Economy Grew At A Solid Pace This Summer, But Consumers Are Wary

A combine harvests wheat by a grain elevator near Mayfield, Kan. Orlin Wagner/AP hide caption

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Orlin Wagner/AP

A combine harvests wheat by a grain elevator near Mayfield, Kan.

Orlin Wagner/AP

Maybe this election cycle really is getting to us.

On Friday, one report showed the economy is growing at a surprisingly quick pace, but another found consumers are feeling less upbeat.

The Commerce Department said the economy grew by 2.9 percent in this year's third quarter. That's a very solid expansion — the fastest pace in two years. It exceeded the 2.5 percent rate most economists had been forecasting.

St. Louis Fed/Bureau of Economic Analysis

St. Louis Fed/Bureau of Economic Analysis

So the upswing in gross domestic product, the widest measure of economic activity, should be making consumers feel more cheerful, right?

It's not. The University of Michigan's Index of Consumer Sentiment showed a drop in consumer attitudes, down to 87.2 in October from September's 91.2 reading.

And the GDP report showed that growth in consumer spending — while decent — has slowed recently. It was up 2.1 percent for the July-through-September period, but that's much weaker than the second quarter's 4.3 percent pace.

So something seems to be causing shoppers to tap the brakes on spending.

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Consumers' somewhat downbeat attitude "may simply reflect a temporary bout of uncertainty caused by the election," Richard Curtin, chief economist for the Michigan consumer survey, said in a statement.

While consumers were feeling anxious in the third quarter, many farmers were feeling good, thanks to a surge in agricultural exports. Their overseas sales grew rapidly, helping push up overall export growth by 10 percent in the third quarter, compared with only 1.8 percent in the second quarter.

And unlike consumers, most economists were feeling better, encouraged to see growth accelerating this late into a recovery. Since 1980, the average length of an expansion has been 79 months. October marked the 88th month of this expansion.

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So does all of that mean the Federal Reserve Board's policymakers will raise interest rates before the year ends? With growth improving, they might decide that inflation is becoming a greater risk and therefore it's time to restrain the expansion by nudging up loan costs.

Many economists see it that way — predicting that in December, the Fed will boost the federal funds rate by 0.25 percentage point, to a range of 0.50 percent to 0.75 percent.

But other economists say Fed policymakers might still see reasons to resist raising rates this year. For example, Lindsey Piegza, chief economist at Stifel Fixed Income, said in her written assessment that while the third-quarter GDP results were "good news," growth for the whole year may average only 1.7 percent.

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The data still show "continued negative business investment, a softening in the consumer section and lackluster inflation," she wrote. For all of those reasons, the Fed might decide it's a good idea to hold off on making loans more expensive.