Economy picks up, but can it maintain pace?

Economy picks up, but can it maintain pace?
Over the past few weeks, there have been better-than-expected reports on employment, retail sales and inventories.

As a result, many economists think gross domestic product could easily top a 4% annual rate in the fourth quarter. That would be the faster rate of growth since the first quarter of 2006.
Some are even more optimistic. Edward Yardeni, president of Yardeni Research, has raised his fourth-quarter growth forecast to a 6.4% rate from 4.5%. This would be the fastest pace in nine years.

At some point, economists know that the boost to growth from fiscal stimulus and the inventory rebuilding will ease back. The key question remains whether the recovery can become self-sustaining before the stimulus eases.

Jim O'Sullivan, chief economist at MF Global Inc. in New York, is betting that the economy will accomplish this feat.

Companies will soon start to hire back laid-off workers, he said, boosting spending and income.

Some important voices are sounding notes of caution.

For instance, Harvard economic professor Martin Feldstein and the economic team at Goldman Sachs, both watched closely by other economists, remain pessimistic.

They believe the economy is in danger of running out of steam early next year.

"We ... continue to think that the recovery will be sluggish and that hiring will, if anything, come closer to following the 'jobless recovery' templates of 1991-1992 and 2001-2003," the Goldman Sachs team wrote in an email to clients.

This debate won't be settled this week. Instead, investors will generally be able to enjoy a feast of positive news.

The most critical data for financial markets will come on Thursday with the release of the new orders for long-lasting durable goods for November.

Economists expect durable goods orders to rebound 0.4% in November after a 0.6% fall in October.

Companies are starting to place more orders for big-ticket items, said Jonathan Basile, economist at Credit Suisse.

"Companies have found they don't have enough product on hand recently. They ran down inventories to a point where it was too low," Basile said.

Home sales remain impacted by the government's homebuyer tax credit, which was set to expire in November but has been extended until the middle of next year.

Sales of existing homes probably rose about 2.5% to a seasonally adjusted annual rate of 6.25 million, according to a survey of economists. That translates into a 37% year-over-year increase, the biggest since September 1983, economists at Barclays Capital noted. Thinking that there was a deadline, homebuyers rushed to complete their deals, analysts said. The data will be released on Tuesday.

Meanwhile, sales of new homes probably fell about 2.3% in November to a seasonally adjusted annual rate of 420,000. The tax-credit is having a more muted impact on new homes because they typically are more expensive, Barclays said. The data will be released Wednesday.

Income and spending data for November will also be released on Wednesday and is expected to be strong.

"Against all expectations, Americans still appear to be in a shopping mood heading into the holiday season," wrote Meny Grauman, economist at CIBC World Markets Inc in Toronto.

Personal income is expected to rise 0.5% in November, a faster pace than October's. That is based on a 0.6% jump in hours worked and a 0.1% gain in average hourly earnings in the November nonfarm payroll report.

Consumer spending is expected to have popped up at a 0.6% pace based on the November retail sales report that showed a stronger-than-expect increase.

Also on Wednesday, the University of Michigan and Reuters will report a revised estimate of consumer sentiment for December.

The Michigan sentiment reading jumped to 73.4 in the first half of December from 67.4 in November and close to the recent peak in September of 73.5.

Analysts polled by MarketWatch are looking for a result of 74 in the final reading of the month.