Fall in exports offset by 13% rise in outlay on defence

THE US economy grew faster than expected in the third quarter as stronger spending by consumers and the government offset falling exports and flat business investment.

The 2 per cent annualised pace was stronger than the second quarter’s 1.3 per cent rate, but still too slow to speed up job creation and more quickly bring down the unemployment rate.

Economists had expected growth of 1.8 per cent in the three months to the end of September.

Consumer spending picked up by 2 per cent from 1.5 per cent in the second quarter, as Americans grew more confident about improvement in the economy and their job prospects. A survey of consumers also released yesterday showed confidence rose this month to a five-year high.

Outlays by the federal government rose by 9.6 per cent after falling in the previous two months, led by a jump in defence spending.

“What saved this figure from being much, much worse was a somewhat freakish surge in government spending, driven by a 13 per cent gain in national defence spending,” said ING analyst Rob Carnell. “Whilst such surges do occur from time to time, the background trend in government spending is at best flat.”

The latest GDP report showed exports, which had risen 5.3 per cent in the second quarter, had fallen 1.6 per cent. Imports were also lower over the past three months.

The report – the broadest measure of economic activity in the country – came as the US presidential race headed into its final days, with less than two weeks until election day.

Amid high unemployment and lacklustre growth, the economy has been the central theme of the campaign, with US president Barack Obama asking voters for more time to let his policies work and Republican presidential rival Mitt Romney arguing that a change in direction is needed to stimulate a stronger recovery.

Other recent data has pointed to a sluggish yet steady recovery. Unemployment fell to 7.8 per cent in September – the lowest point since Mr Obama took office in 2009 – but is still higher than the historic levels at which presidents have been re-elected.

Consumer sentiment has brightened in recent months as the jobs outlook has improved and the housing market has shown signs of turning a corner. Yesterday, a University of Michigan index showed consumer sentiment rose to 82.6 in October from 78.3 in September. That was the best level since September 2007 – before the recession – but was slightly lower than a preliminary reading of 83.1 earlier this month, and below expectations of 83.

Analysts warned, however, that the lack of clarity over tax and spending policy related to the fiscal cliff – a set of tax increases and government spending cuts scheduled for the end of the year – posed a significant threat to such upbeat trends. – (Copyright The Financial Times Limited 2012)