US economic growth increased at its fastest in a year in the third quarter as consumers and businesses set aside fears about the recovery and stepped up spending, creating momentum that could carry into the final three months of the year.
Though part of the increase came from the reversal of temporary factors that had restrained growth, the expansion was a welcome relief for an economy that looked on the brink of recession just weeks ago.
US gross domestic product expanded at a 2.5 per cent annual rate in the third quarter, the Commerce Department said in its first estimate today. That was a big acceleration from the 1.3 per cent pace in the April-June quarter and matched economists' expectations.
"The probability of a double-dip has diminished quite a bit," said Sung Won Sohn, an economics professor at California State University in the Channel Islands. He made the comments before the release of the report.
Consumer spending in the last quarter was the strongest since the fourth quarter of 2010, while business investment spending was the fastest in more than a year. Even though consumer spending was stronger, businesses were slow in stocking up their warehouses.
The peppier spending and a slower pace of inventory accumulation by businesses will lay a base for a solid fourth quarter, but a slowdown in Europe and the exhaustion of pent-up US demand could leave a weak spot early in 2012.
And the recovery's pace is still too weak to lower a jobless rate that has been stuck above 9 per cent for five straight months.
A jump in fuel prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan's earthquake had curbed auto production. Motor vehicle output has surged as those supply constraints have eased.
In addition, car sales, which were held back by the lack of popular models, have also shown renewed strength.
As a result, consumer spending, which accounts for about 70 per cent of US economic activity, grew at a 2.4 per cent rate after slowing to a 0.7 per cent pace in the second quarter.
The relative vigour comes even though consumer confidence has hit levels last seen during the worst of the 2007-09 recession.
Similarly, while some business surveys have pointed to a contraction in factory output, there is little sign corporate America is cutting back spending. Indeed, recent data has suggested business spending is picking up. Business spending rose at a 16.3 per cent pace as companies splurged on equipment and software, and invested in non-residential structures.
Inventories rose only $5.4 billion in the third quarter, the smallest gain since the fourth quarter of 2009, after increasing $39.1 billion in the second quarter. Inventories subtracted 1.08 percentage points from GDP growth. Excluding the drag from inventories, the economy grew at a 3.6 per cent pace - pointing to underlying strength in domestic demand - after expanding 1.6 per cent in the April-June period.
Apart from consumer and business spending, growth in the third quarter was also supported by a smaller US trade deficit, and the careful management of business inventories bodes well for fourth-quarter production.
Spending on residential construction rose at a modest 2.4 per cent pace after growing at a 4.2 per cent rate in the second quarter. Government spending was flat, reflecting continued budget cuts by state and local governments. However, the pace of decline in state and local government spending is moderating.
The GDP report also showed a moderation in inflation pressures, with the personal consumption price index (PCE) rising at a 2.4 per cent rate in the third quarter, slowing from the April-June quarter's 3.3 per cent pace. Core PCE, which excludes food and energy, rose at a 2.1 per cent rate after increasing 2.3 per cent in the second quarter.
Reuters
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