Bloomberg News

Economy in U.S. Probably Expanded at the Fastest Pace in a Year

November 02, 2011

Oct. 27 (Bloomberg) -- The U.S. economy probably grew in the third quarter at the fastest pace this year as gains in consumer spending and business investment helped sustain a recovery on the brink of faltering, economists said before a report today.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual pace after advancing 1.3 percent in the previous three months, according to the median forecast of 83 economists surveyed by Bloomberg News. Household purchases, the biggest part of the economy, may have climbed more than twice as fast as in the second quarter.

A drop in gasoline prices coupled with cuts in savings made the pickup in consumer spending possible as the pace of growth failed to reduce an unemployment rate stuck at 9.1 percent. The lack of jobs prompted the Obama administration and Federal Reserve policy makers to propose additional measures aimed at stimulating growth and hiring.

“The U.S. economy finished the third quarter a lot better than it started,” said David Semmens, a U.S. economist at Standard Chartered Bank in London. “While the recovery at first appeared to have lost its way, it is certainly not off track.”

Due at 8:30 a.m. in Washington, the Commerce Department report is the first of three for the quarter, with updates scheduled for November and December when more information becomes available. Survey estimates for GDP growth ranged from 1.5 percent to 3.5 percent.

Other reports today may show fewer Americans filed claims for jobless benefits last week and more prospective buyers signed contracts in September to purchase existing homes.

First-Half Growth

The economy grew at an average 0.9 percent rate in the first half of 2011, the worst performance of the recovery that began in June 2009. GDP needs to exceed 2.5 percent to reduce the jobless rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.

Growth managed to accelerate even as the quarter was marked by the first downgrade of U.S. debt in history and a plunge in stocks caused by rising concern that one or more euro zone countries would default.

The Standard & Poor’s 500 Index dropped 14 percent in the third quarter, the biggest decrease since 2008, hurting confidence. The Bloomberg Consumer Comfort Index declined in September to the second-lowest level in 26 years of data.

More Spending

Consumer spending probably increased at a 1.9 percent annual rate in the July-September period after rising 0.7 percent in the second quarter, the weakest gain since 2009, according to the median projection. Purchases climbed at an average 2.7 percent annual rate during the expansion that ended in December 2007.

One reason for the rebound may be a decrease in fuel prices. The cost of a gallon of regular gasoline at the pump fell to $3.43 at the end of September from a high of $3.99 in early May, according to AAA, the largest U.S. auto group.

Additionally, the savings rate dropped to an almost two- year low of 4.5 percent in August after averaging 5.1 percent in the second quarter, figures from the Commerce Department show.

McDonald’s Corp., the world’s biggest restaurant chain, is among companies trying to keep prices down to attract budget- conscious customers as unemployment saps confidence. Oak Brook, Illinois-based McDonald’s this month said third-quarter profit gained 8.6 percent.

“The environment out there is still fragile,” James Skinner, McDonald’s vice chairman and chief executive officer, said on an Oct. 21 call with analysts. “Consumers everywhere continue to be cautious and hesitant to spend.”

Japan Disaster

The waning of supply disruptions following the March earthquake and tsunami in Japan also led to a rebound in auto purchases. Cars and light trucks sold at an average 12.5 million annual rate last quarter, up from a 12.1 million pace in the previous three months.

Overseas demand for U.S. made-goods and corporate investment also helped sustain the recovery last quarter. July and August were the best months for U.S. exports on record, according to figures from the Commerce Department. A report from the agency yesterday showed sales of non-military capital equipment, like computers and generators, and excluding aircraft climbed at a 17 percent annual rate from July through September compared with an 11 percent gain in the previous three months.

The pickup in business investment didn’t translate into more jobs. Payrolls rose by 96,000 workers a month on average last quarter, down from 166,000 in the first three months of the year.

Obama, Fed

President Barack Obama proposed a $447 billion jobs bill, which included expanding a payroll tax break due to expire at the end of this year, increasing spending on public works projects and extending jobless benefits.

Obama yesterday said he is seeking ways to take action without congressional approval after the Senate blocked the measure earlier this month. The steps include altering a program to help homeowners refinance mortgages and easing the burden of student loans.

Fed policy makers pledged in August to hold the benchmark interest rate near zero through the middle of 2013 so long as joblessness stays high and the inflation outlook is “subdued.” On Sept. 21, they announced a plan to replace debt in the central bank’s portfolio with longer-term Treasuries to help cut borrowing costs.


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