Reuters/Washington
The US economy grew at its fastest pace in a year in the third quarter as consumers and businesses stepped up spending, creating momentum that could carry into the final three months of the year. However, part of the increase in output came from the reversal of temporary factors that had restrained growth and some analysts worry the economy could stumble badly in the new year. Still, the expansion was a welcome relief for an economy that looked on the brink of recession just weeks ago. US gross domestic product expanded at a 2.5% annual rate in the third quarter, the Commerce Department said in its first estimate yesterday. That was a jump from the 1.3% pace in the April-June quarter and matched economists’ expectations. “It validates that the economy is in a modest growth mode. It’s a solid report, there were gains across the board,” said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut. The data and an agreement by European leaders to boost the regain’s bailout sparked a rally on Wall Street. US Treasury debt prices fell, while the dollar dropped against a basket of currencies. The report could offer some solace to Federal Reserve policymakers who meet next week to debate additional ways to help the economy. Consumers and businesses appeared to have set aside their fears about the recovery. Consumer spending was the strongest since the fourth quarter of 2010, while business investment spending was the fastest in more than a year. Businesses had not anticipated the fairly strong demand and were slow to restock warehouses. The peppier spending and a slower pace of inventory accumulation by businesses will lay a base for a solid fourth quarter, but a slowdown in Europe and the exhaustion of pent-up US demand could leave a weak spot early in 2012. And the recovery is still too weak to lower a jobless rate that has been stuck above 9% for five straight months. A separate report from the Labor Department showed new claims for state unemployment benefits fell 2,000 last week to a seasonally adjusted 402,000, pointing to a gradual improvement in the labour market. A jump in gasoline prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan’s earthquake had curbed auto production. Motor vehicle output has surged as those supply constraints have eased. As a result, consumer spending, which accounts for about 70% of US economic activity, grew at a 2.4% rate after a 0.7% pace in the second quarter. But consumers had to dip into their savings to fund their expenditures in the third quarter after disposable income adjusted for inflation fell 1.7%. Economists expect abating price pressures to prop up incomes in the quarters ahead. The personal consumption price index (PCE) rose at a 2.4% rate in the third quarter, slowing from the April-June quarter’s 3.3% pace. Core PCE, which excludes food and energy, rose at a 2.1% rate after increasing 2.3%. The relative vigor in consumer spending comes in spite of consumer confidence hitting levels last seen during the worst of the 2007-09 recession. Similarly, while some business surveys have pointed to a contraction in factory output, corporate America actually increased its investment spending during the quarter. Business spending rose at a 16.3% pace as companies splurged on equipment and software, and invested in nonresidential structures. Inventories posted their smallest gain since the fourth quarter of 2009 and subtracted 1.08 percentage points from GDP growth. Excluding the drag from inventories, the economy grew at a 3.6% pace—pointing to underlying strength in domestic demand—after expanding 1.6% in the April-June period. The careful management of business inventories bodes well for fourth-quarter production. Still, there are no signs of the housing market improving and a report from the National Association on Realtors yesterday showed pending sales of previously owned homes fell for a third successive month during September. Government spending was flat in the third quarter, reflecting continued budget cuts by state and local governments. However, the pace of decline in state and local government spending is moderating.