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Not so fast: Economy could sputter into year's end

Just when it looks like the U.S. economy is about to blast off, there come a few reminders that it's best to keep expectations grounded.

Yes, gross domestic product improved at a better-than-forecast 3.9 percent in the third quarter, thanks to spending improvements from consumers, businesses and the government.

On the same day that data set was released, however, news broke that consumer sentiment fell heading into the holiday season while manufacturing in the Federal Reserve's Richmond district performed well short of expectations.

So what gives?

People walk past a store displaying a discount sign in New York on Nov. 21, 2014.
Jewel Samad | AFP | Getty Images
People walk past a store displaying a discount sign in New York on Nov. 21, 2014.

Taken together, it's all part of an economy that remains in fits-and-starts mode rather than a glide path to the moon. Animal spirits have been in full vigor on Wall Street, but there's also a considerable level of caution on Main Street, spurred in large part by a teetering global economy and stagnant wage growth that raise questions over whether growth is sustainable.

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Lindsey Piegza, chief economist at Sterne Agee, issued a note Tuesday that summed up the concerns weighing on the economy despite the solid GDP performance in the third quarter:

(GDP showed) hearty, positive revisions in nearly all key categories of growth, suggesting the economy was on firmer footing than originally expected at the start of the second half. Still, with international growth expected to eat further in the U.S. external sector as we head to the end of the year, government spending likely to cool after a ramp up in end-of-the-fiscal-year defense spending, and a pullback in producer activity as consumers appear to be tightening purse strings particularly on goods spending, a stronger Q3 report may simply mean a further way to fall as we turn the corner into 2015.

The Conference Board's Consumer Confidence Survey told a disheartening story: More respondents said business conditions are "bad" while fewer said they are "good." The employment outlook edged lower, while general optimism fell and pessimism grew.

In the Richmond Fed survey, conditions improved mildly, with an overall reading of 4 in a survey where anything above zero represents growth. However, the November gauge took a major tumble from October's 20 read. The survey was in sharp contrast to a similar reading last week from the Philadelphia Fed, which saw its index double from the previous month, but seemed to confirm other Fed districts that showed improving but tempered growth.

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Markit's survey of 650 companies released Monday, showed business activity at its lowest level since April. It was a survey that contradicted most of the other recent data, particularly with regard to its poor outlook for capital expenditures.

Economists at Markit were quick to point out that activity continues to increase at an overall "robust" pace, but noted "the economic upturn has lost considerable momentum."

Peter Boockvar, chief market analyst at The Lindsey Group, said the economy is likely to show full-year growth of about 2.25 percent—little changed from the previous two years:

Bottom line, unfortunately we saw no follow-through to the big jump in October (from the Markit survey), especially with the big focus on the drop in gasoline prices and its becoming more clear that after the strong economic bounce back in Q2 and Q3 after the tough Q1, Q4 growth will be more tempered. Lower gasoline prices are of course great for consumers but the overall cost of living still continues higher

The economic murkiness is likely to keep the Federal Reserve skittish about raising interest rates, despite how positive some of the signs are, particularly in employment.

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Talk about the central bank raising rates in early 2014 has been noticeably dissipating, with Piegza saying there's little chance of an aggressive Fed:

The Fed remains cautiously optimistic, with lingering and new barriers to growth still stunting official's desire to raise rates in the near term. At this point, while things appear to be pointing in the right direction, we urge patience; we still need further confirmation that the U.S. economy—including the labor market—is on strong enough footing before the Fed can think about raising rates.