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.)