UPDATE: US 3Q GDP +2.0% As Consumer Spending Perks Up
October 29 2010 - 10:44AM
Dow Jones News
The U.S. economy expanded at a slightly faster pace in the third
quarter as consumer spending perked up, but growth remains too weak
to cut unemployment any time soon.
Gross domestic product, the value of all goods and services
produced, rose at an annual rate of 2.0% after climbing 1.7% in the
second quarter, the Commerce Department said Friday. Economists
polled by Dow Jones Newswires were expecting GDP to rise by 2.1% in
the July to September period.
The government report was the last significant economic
indicator before midterm elections Nov. 2 and a Federal Reserve
meeting ending Nov. 3. More than a year after the recession ended,
stubbornly high unemployment could hurt Democrats in Congress and
is likely to be a key factor in getting the Fed to resume bond
purchases.
The GDP breakdown showed that spending by Americans, accounting
for about 70% of demand in the U.S. economy, rose at a 2.6% rate.
That's the fastest pace since the end of 2006--about a year before
the recession began--and is up from a 2.2% increase in the April to
June period and a 1.9% in the first quarter.
Though an improvement, consumer spending remains well below
levels seen following previous U.S. recessions. Americans' wealth
and incomes were badly hit by the collapse in home prices and the
extremely weak jobs market that followed the financial crisis. In
the four quarters after the last deep U.S. recession in 1982,
consumer spending posted increases of between 4% and 8%.
What's more, a lot of the spending continued to go into goods
and services imported from abroad. Although the rise in imports
decelerated in July-September compared with the second quarter, it
remained above the increase in exports, meaning trade was a drag on
the economy. Imports were up 17.4% in the third quarter while
exports rose by 5.0%.
Business inventories added to growth, meantime, while spending
by companies slowed in the third quarter and housing was a
drag.
With the holiday season just around the corner, the outlook for
spending doesn't look great either. A gauge of consumer confidence
has been falling since June as Americans worry about weak home
prices and jobs.
The economic recovery has been too soft to bring about a
significant improvement in unemployment. Companies haven't ramped
up hiring, concerned the economy will stay weak while taxes could
increase to help tackle a huge budget deficit. Unemployment was
stuck at 9.6% in September, close to the 10.1% post-recession high
hit in October 2009.
As evidence that tight job market conditions are holding down
compensation increases, a separate report Friday showed employment
costs posted another modest gain in the third quarter.
Employment costs for civilian workers rose just 0.4% in
July-September, the Labor Department said. Compensation for workers
in state and local governments, who have been hit by shrinking
budgets, was flat, marking the worst performance on records going
back 28 years.
Fed Chairman Ben Bernanke believes the main reason unemployment
is high is because the economy remains too weak. That, coupled with
inflation running below the Fed's 2.0% goal, is likely to lead the
central bank to announce more bond purchases next week. In an
effort to spur growth by keeping borrowing rates low, the Fed is
likely to announce plans to buy U.S. Treasury bonds worth a few
hundred billion dollars over several months.
The GDP report Friday showed inflation remains very soft. The
Fed's preferred gauge, the price index for personal consumption
expenditures excluding volatile food and energy items, rose an
annualized 0.8% in the third quarter, slowing down from the second
quarter's 1.0% increase.
Other inflation gauges were also muted. The overall price index
for personal consumption expenditures rose by 1.0% in the third
quarter, after a flat reading in the second quarter. Gross domestic
purchase prices rose 0.8%, after a 0.1% increase in the second
quarter.
Friday's report, the first GDP estimate for the third quarter
that often gets revised substantially, also showed that federal
government spending and investment rose by 8.8%, following a 9.1%
increase in the second quarter.
A second GDP estimate, based on more complete data, will be
released by the Commerce Department Nov. 23.
The Commerce Department's release on GDP can be found at:
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
-By Luca Di Leo and Jeffrey Sparshott Dow Jones Newswires; 202
862 6682; luca.dileo@dowjones.com
(Meena Thiruvengadam and Jeff Bater contributed to this
article.)