Consumer spending lifts US growth in Q3

WASHINGTON - US economic growth edged up as expected in the third quarter but not enough to chip away at high unemployment or change perceptions of more monetary easing from the Federal Reserve next week.

By (Reuters)

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Published: Fri 29 Oct 2010, 7:15 PM

Last updated: Mon 6 Apr 2015, 11:46 AM

Gross domestic product expanded at a 2.0 percent annual rate as consumer spending rose at its quickest pace since 2006 and businesses continued to rebuild inventories, the Commerce Department said on Friday. The economy expanded at a 1.7 percent rate in the second quarter and third-quarter growth matched economists’ expectations.

“Growth is still positive, but a bit disappointing. It’s not where we would like it to be at this point of the recovery,” said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida.

The GDP report probably will not dissuade Fed officials at their Nov. 2-3 meeting from announcing a second round of bond purchases next week to push interest rates down further and energize the recovery. But it is likely to color their debate.

Analysts expect the Fed to announce bond purchases of at least $100 billion a month to push borrowing costs lower and spur businesses to expand investment and hiring.

The economy is experiencing a slow recovery by historical standards, with unemployment at 9.6 percent and Americans increasingly nervous about the future.

That is expected to shift the country’s political landscape in Tuesday’s congressional elections, seen as a vote on President Barack Obama’s performance on the economy. His Democratic party is expected to suffer big losses.

The US central bank cut overnight interest rates to near zero in December 2008 and has bought about $1.7 trillion worth of Treasury and mortgage-related debt since then.

Consumption solid, trade drags

Economists say a growth pace of at least 3.5 percent, driven by solid domestic demand and exports, over several quarters is needed to bring down high unemployment.

A pick-up in consumer spending gave the economy a lift in the last quarter. Third-quarter growth in consumer spending, which accounts for 70 percent of US economic activity, increased at a 2.6 percent rate after rising 2.2 percent in the prior period.

The third-quarter increase was the largest since the fourth quarter of 2006 and added 1.79 percentage points to GDP growth.

But the surge in consumption was largely satisfied by imports, rather than domestic production.

Output was also supported by a $115.5 billion increase in business inventories after a $68.8 billion rise in the second quarter. Business inventories added 1.44 percentage points to growth, but this could be at the expense of fourth-quarter growth.

Excluding inventories, the economy expanded at a 0.6 percent pace, slowing from 0.9 percent in the second quarter. Although business spending continued to grow in the July-September quarter, the pace slowed from the prior period, with notable moderation in investment in equipment and software after three quarters of robust growth. Spending on equipment and software slowed to a 12.0 percent rate in the third quarter after a vigorous 24.8 percent rate in the prior period. However, investment in structures grew for the first time since the second quarter of 2008.

Growth was also held back as imports continued to outpace exports. But the trade deficit narrowed somewhat during the quarter, subtracting 2.01 percentage points from GDP growth compared to 3.5 percentage points in the second quarter. Residential construction was also a drag on growth in the third quarter, reflecting the end of a tax credit for home buyers. Government spending made a modest contribution to growth as investment by state and local governments dropped in the third quarter after rising in the prior period.

The report also showed inflation pressures remained muted in the third quarter, underscoring the Fed’s discomfort with the current disinflationary environment. The personal consumption expenditures (PCE) index, excluding food and energy, rose at an annual rate of 0.8 percent in the third quarter, the smallest increase since the fourth quarter of 2008 and well below the Fed’s comfort zone for inflation. The index increased at a 1.0 percent rate in the second quarter.

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