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Analysis: U.S. third-quarter growth may disappoint, but economy looking better

Ford Motor production workers assemble batteries for Ford electric and hybrid vehicles at the Ford Rawsonville Assembly Plant in Ypsilanti T
Ford Motor production workers assemble batteries for Ford electric and hybrid vehicles at the Ford Rawsonville Assembly Plant in Ypsilanti T

By Lucia Mutikani

WASHINGTON (Reuters) - When the U.S. government reports on economic growth for the third quarter next month, the result may very well disappoint.

But the reading could mask a fundamental improvement.

If the fairly buoyant signals from sentiment surveys of various sectors are correct, the economy is on the brink of faster growth and a strengthening in the labor market.

While so-called hard economic or source data showing the economy's actual performance have suggested growth slowed at the start of the third quarter, forward-looking surveys on manufacturing, services, consumer confidence and hiring intentions by small business have been relatively robust.

The sentiment surveys, which include the Institute for Supply Management's manufacturing and services sector surveys and the National Federation of Independent Businesses' small businesses survey, tend to pick up increases in economic activity a month or two ahead of the hard data, economists said.

"What the sentiment surveys are telling us is that we are on the cusp of a meaningful acceleration, whether that happens at the tail end of the third quarter or at the start of the fourth quarter, we don't know just yet," said Millan Mulraine, senior economist at TD Securities in New York.

"If you look at the ISM, it's saying it's happening now. If you look at the NFIB, it's saying it's likely to happen within the next two or three months."

Economists say the bullish surveys, especially the ISM August manufacturing survey that showed the sector growing at its strongest pace in two years, would suggest growth at an annual pace of at least 3 percent this quarter. The ISM manufacturing index is closely correlated with gross domestic product.

But data released by the government for July and August so far points to a growth pace of not more than 2 percent. Economists said despite the dichotomy in the data, the strong signals from the sentiment surveys are likely to embolden the Federal Reserve to initiate cutbacks to its monthly bond purchasing program next week.

"The ISM suggests were not going to see a significant pullback in GDP this quarter," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania. "I think the Fed will look at the ISM and auto sales. On net, the signs are encouraging."

STRONG MANUFACTURING SURVEY

The ISM index of national factory activity rose in July and August, driven by robust new orders.

New orders, a leading indicator of factory activity, have risen strongly in each of the last two months, and hit their highest level in nearly 2-1/2 years in August according to the ISM report.

Surprisingly, however, those sturdy gains have not been reflected in the government's data on durable goods and industrial production.

"There seem to be statistically significant increases, which usually does foreshadow stronger hard data," said Scott Anderson, chief economist at Bank of the West in San Francisco.

"We just haven't seen it yet showing up in the numbers."

An acceleration in manufacturing activity has also been telegraphed by a jump in automobile sales last month to their highest level since October 2007 and a pick-up in factory hiring.

Surveys on the services sector and home building have also been upbeat. But they too have yet to feed through to the hard data. Not only did the ISM services survey show expansion in the sector at a near eight-year peak in August, its employment gauge was the highest in six months.

BRIGHTENING JOBS PICTURE

Adding to the brightening labor market picture, the NFIB survey showed hiring intentions by small business owners in August rising to levels last seen in January 2007.

While first-time applications for state unemployment benefits are not a leading indicator of employment, they have been hovering at pre-recession levels. Yet, employment growth in August came in below Wall Street's expectations.

"It really did not line up well with August payrolls, so perhaps we will get a big jump in September payroll jobs," said Anderson.

Not everyone, however, is convinced.

Thomas Lam, chief economist at DMG & Partners Securities in Singapore, said that over the past four quarters, GDP growth had come in around one percentage point lower on average than the sentiment data had suggested.

"The recent results from surveys could be exaggerating the guidance on the current pace of economic growth," he said.

(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Chizu Nomiyama)

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