Thursday's GDP report may show the economy grew in the third quarter at its fastest pace in a year.
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Economists expect to see growth of 2.5 percent, after dismally slow growth averaging less than 1 percent for the first half of this year. The question is: Can the economy's reacceleration continue into the fourth quarter or will it once more sputter along?
"The big story is we're no longer on life support," said Bank of Tokyo-Mitsubishi financial economist Chris Rupkey. "We're not at stall speed of 1 percent, like we were in the first half of the year. Stall speed is where bad things can happen."
The September durable goods report Wednesday was the latest in a string of better-than-expected data. The durable goods report showed that demand for a range of longer lasting manufactured goods saw its largest increase in six months. The Commerce Department reported that durable goods orders, excluding transportation, rose 1.7 percent after dipping 0.4 percent in August. But like much of the recent data there was a wrinkle — demand for transportation equipment declined, taking the overall orders number to 0.8 percent.
Third quarter GDP is released at 8:30 a.m. ET, at the same time weekly jobless claims are reported. Claims are expected to once more come in at about 400,000, a level they've been close to for four months.
"I can hear the lament already. It (growth) is not fast enough to bring down the stubbornly high jobless rate...We're off life support. Things are better," Rupkey said. He expects to see the economy added about 100,000 jobs when the October employment report is released a week from Friday.
Despite the improving data, the sentiment readings are at dismally low levels. Consumer confidence, reported Tuesday, was at a two-and-a-half year lowof 39.8, from a reading of 46.4 the month earlier.
Economists forecasts for third-quarter GDP have fluctuated dramatically over the past several months, starting out above 3 percent but falling into the 2 percent zone, then 1 percent, as economists became more worried the economy could dip back into recession, after weaker data during the summer months. First-quarter GDP was at 0.4 percent, while the second-quarter growth was 1.3 percent. In the fourth quarter of last year, growth was 2.3 percent, and it was at 2.5 percent in third quarter, 2010, down from 3.8 percent in the second quarter of 2010.
Rupkey said some of the positives helping growth include business spending and consumer spending.
"I think it's going to be better than many people thought it would look like, just a few weeks ago," said Deutsche Bank chief U.S. economist Joseph LaVorgna. "I've got it at 2.7, but I'm trying not to let renewed enthusiasm push it (the estimate) up too high."
Both Rupkey and LaVorgna said federal government spending could surprise to the upside, giving the number an added boost. "I'm estimating we had a defense spending increase of about 8 percent,' said LaVorgna. " I think you'll have good final sales, at 3.3 and inventory building, I think will be pretty modest."
"It could get people a little bit more upbeat about the current quarter," he said.
But J.P. Morgan senior economist Robert Mellman said he currently does not expect the accelerated growth to spill over into the fourth quarter and he is currently looking at fourth-quarter growth of about 1 percent — 2 percent if he revises it with incoming data.
"The momentum looks better, but we think things are going to slow in the fourth quarter," he said. Mellman expects to see an inventory correction, and he also points to the decline in the savings rate as consumer spending grew.
What Else to Watch
Investors will be watching for the fallout from European leaders' efforts to agree to bailout plans Wednesday.
Stocks finished higher Wednesday, helped by a positive flow of news form the European leaders meeting during afternoon trading. Traders particularly latched on to the idea that China may take a role in the process. French President Nicolas Sarkozy was reported to be set to call China's Hu Jintao Thursday to discuss what assistance China might lend the European Financial Stability Facility (EFSF) .
Besides GDP and jobless claims, pending-home sales are expected at 10:00 a.m. The Treasury auctions $29 billion in 7-year notes at 1 p.m.
Companies reporting earnings in the morning include ExxonMobil, Procter and Gamble, Altria, Royal Dutch Shell, AstraZeneca, Banco Santander, Bristol-Myers Squibb, Barrick Gold, Colgate-Palmolive, Dow Chemical, Hershey, Moody's, International Paper, Potash, Starwood, United Continental, US Air, Aetna and Avon Products. After the bell reports are expected from AMD, Baidu, Expedia, MetLife, and Las Vegas Sands.
