Q4 GDP could see more consumer lift than Q3. Here's why

Consumers seem to have held back on spending in the third quarter from second-quarter levels, but they could snap back in the fourth quarter, based on high confidence levels and falling gasoline prices.

Third-quarter GDP is released at 8:30 a.m. EDT Thursday, and the first reading is expected to show growth of 3.2 percent, according to the CNBC/Moody's Analytics rapid update of economists' estimates.

"This is likely to have slower consumer spending in it. Generally, you want to have GDP with business investment and spending and I think investment is alright, at least investment in equipment. I think the consumer is a little softer, at about 2 percent," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. In the second quarter, consumer expenditures were at 2.5 percent, while GDP grew at an annualized rate of 4.6 percent.

Barclays chief U.S. economist Dean Maki said he expects GDP growth of 3 percent for the third quarter and a weaker contribution from consumer expenditures with a 1.5 percent gain.

A shopper looks at Michael Kors handbags at Macy's flagship store in New York.
Scott Mlyn | CNBC
A shopper looks at Michael Kors handbags at Macy's flagship store in New York.

Real consumer spending growth averaged 2.1 percent over the 12 quarters, ending in 2013 and averaged 1.9 percent in the first half of the year, after a weather-related slump in the first quarter, according to Amherst Pierpont chief economist Stephen Stanley. He said a solid gain in June had made it seem the third quarter would be stronger, but consumer demand has instead been more mediocre in recent months.

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But falling gasoline and an improving job market could change that. Both Maki and Rupkey expect a consumer rebound in the fourth quarter, just in time for the holiday shopping season.

"I think car sales will snap back more, and gasoline prices are good, and there's a lot of people with pay checks out there. There's simply just more consumers out there and two million more jobs this year, and cheaper gas is good," Rupkey said. "Gas prices can be a game changer in terms of their spending."

Rupkey said gasoline price increases in the spring and summer sometimes coincide with economic soft patches, and with more U.S. energy production that could change. Gasoline prices have fallen with dropping world oil prices, weaker in large part because growing North American production is keeping the world well supplied at the same time demand growth is sliding.

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Maki said consumer spending in the current, fourth quarter could rise sharply. "The risk is it goes to 3 to 3.5 percent. Consumer spending is 68 percent of GDP," he said. "To me that's the dominant force in the near term outlook." He said if spending rises that dramatically, fourth quarter GDP could also move up to the 3 to 3.5 percent level.

"We haven't changed our forecast for fourth quarter, at 2.5 percent, but I do think risks are growing to the upside. We're expecting a decline in headline CPI inflation on a quarter-on-quarter basis. Anytime, we've seen that in the past, outside of a recession, that's been accompanied by stronger consumer spending growth," said Maki, adding that's only occurred outside of recession three times in the past 25 years. Energy is behind the drop in CPI.

When headline CPI declined in the second quarter of 2003, consumer spending jumped 4.5 percent, and it rose 4.1 percent when CPI declined in Q4, 2006. Consumer price inflation also declined in second quarter, 2010, and consumer spending rose by 3.3 percent.

Maki said gasoline at the pump has already declined $0.50 per gallon since June, and futures suggest prices could fall another 20 percent year over year by March. Gasoline was at $3.02 per gallon nationally Wednesday, according to AAA, and analysts expect it to fall through $3 a gallon nationwide by next week.

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"When consumers are spending less on gasoline, they have more to spend elsewhere," said Maki. "That effect tends to happen quickly in the U.S. partly because consumers don't save very much."

Maki said the effect from lower fuel prices should be around for a while. "Gasoline is about 3 percent of consumer spending so if you crank through the math, that should be about 0.6 rise in consumer income in that year ending in March," he said.

"It's hard to translate real consumer spending numbers into holiday sales," said Maki. "I can say more generally before this happened, I would be looking for a moderate holiday season so I think this similarly raises the risk of a stronger holiday shopping season."

If GDP for the third quarter comes in as expected, and fourth quarter GDP rises above 3 percent, it would be the first time since the recession that the economy grew at more than 3 percent for three quarters in a row.

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"If consumers spend as much as they are happier, then it should be a pretty good fourth quarter," said Rupkey.

Weekly jobless claims data is also reported at 8:30 a.m. Thursday, and it is expected to show 284,000 claims. Improvements in the labor market are behind the sharp jump in consumer confidence reported earlier this week. Consumer confidence rose to 94.5 in October, from 89 in September, the highest level in seven years.

Traders Thursday will also be considering the Fed's more hawkish comments on the jobs market and inflation, which sent markets on a roller coaster ride Wednesday afternoon when its statement was released. Fed Chair Janet Yellen speaks at 9 a.m. ET at the Fed's National Summit on Diversity in the Economics Profession. She is making welcoming remarks, and is not expected to answer questions.

Dozens of earnings are expected, with ConocoPhillips, MasterCard, CME Group, Altria, Royal Dutch Shell, Cardinal Health, Cigna, Public Service, Time Warner Cable, Alcatel-Lucent, Kellogg, Johnson Controls, Teva, Fortress Investment, and Air Products reporting before the open. Starbucks, Microchip Tech, Boston Beer, GoPro, LinkedIn, Groupon and Tesoro report after the closing bell.