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US consumers boost economic growth

Oct 26 2012 14:56 Reuters

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Washington - US economic growth picked up in the third quarter as a late burst in consumer spending offset the first cutbacks in investment in more than a year by cautious businesses.

The stronger pace of expansion, however, fell short of what is needed to make much of a dent in unemployment, and offers little cheer for the White House ahead of the closely contested November 6 presidential election.

Gross domestic product expanded at a 2% annual rate, the Commerce Department said on Friday, accelerating from the second quarter's 1.3% pace. A pace in excess of 2.5% is needed over several quarters to make substantial headway cutting the jobless rate.

Economists polled by Reuters had expected a 1.9% growth pace in the third quarter. The report comes a little more than a week before the election in which President Barack Obama is trying to fend off Republican challenger Mitt Romney.

Since climbing out of the 2007-09 recession, the economy has faced a series of headwinds from high gasoline prices to the debt turmoil in Europe and, lately, fears of US government austerity.

It has struggled to exceed a 2% growth pace and remains about 4.5 million jobs short of where it stood when the downturn started.

Consumers, however, largely shrugged off the impending sharp cuts in government spending and higher taxes, which are due at the start of the year absent congressional action.

Indeed, they went on a bit of a shopping spree as the quarter wound down, buying a range of goods - including automobiles and Apple's iPhone 5.

Consumer spending, which accounts for about 70% of US economic activity, grew at a 2% rate after increasing 1.5% in the prior period.

Spending despite income squeeze

High stock prices and firming house values have made households a bit more willing to take on new debt, supporting consumer spending. However, incomes were squeezed in the last quarter, causing households to save less to fund their purchases.

The amount of income available to households after accounting for inflation and taxes rose at a tepid 0.8% rate in the third quarter, slowing for a brisk 3.1% pace the prior period. The saving rate slowed to a 3.7% rate after increasing 4% in the second quarter.

The faster pace of spending was achieved despite a spike in inflation pressures as gasoline prices rose. A price index for personal spending rose at a 1.8% rate, accelerating from the second quarter's 0.7% pace.

But a core inflation measure that strips out food and energy costs slowed to a 1.3% rate after rising 1.7% in the prior quarter, suggesting the increase in overall price pressures will be temporary.

With about 23 million Americans either out of work or underemployed, there are fears the current pace of spending will not be sustained, especially if gasoline prices maintain their recent upward march and families get a higher tax bill in 2013.

The automatic tax hikes and government spending cuts, known as the "fiscal cliff," will drain about $600bn out of the economy next year absent congressional action.

Fiscal cliff fears have already hammered business spending, which dropped at a 1.3% pace in the third quarter, falling for the first time since the first three months of 2011.

Part of the drag in business investment, which had been a source of strength for the economy, came from equipment and software, where outlays were the weakest since the second quarter of 2009.

Spending on nonresidential structures contracted after five straight quarters of growth.

In contrast, home building surged at a 14.4% rate, thanks in large part to the Federal Reserve's ultra accommodative monetary policy stance, which has driven mortgage rates to record lows.

Inventories were a drag on growth because of a drought in the country's Midwest, which has decimated crops. Farm inventories cut 0.42 percentage point from GDP growth.

In addition, slowing global demand, particularly weakness in Europe and China, caused US exports to contract for the first time since the first quarter of 2009. That left a trade deficit that weighed on GDP growth.

But there was surprisingly good news on government spending, which snapped eight straight quarters of declines on a strong rebound in defense outlays.

consumers  |  us economy  |  gdp
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