Thursday’s advance reading on U.S. economic growth in the third quarter shows that this winter might not be quite as bleak as feared just a couple of months ago. Despite jitters heightened by Europe’s sovereign debt crisis and Standard & Poor’s August downgrade of the U.S. credit rating, the American economy grew at a 2.5 percent annual rate in the July-to-September quarter, the Commerce Department said on Thursday. The growth offers hope that the U.S. can avoid a double-dip recession and that the gathering economic momentum could carry into the fourth quarter of the year and, possibly, into 2012.
The 2.5 percent jump was in line with economists’ expectations, which had been climbing in recent weeks—and it is more than double the weak 0.9 percent growth posted in the first half of the year.
Consumers and businesses both helped spur the improvement. Consumer confidence has plunged in recent months, but consumer spending — which makes up 70 percent of the U.S. economy — still increased 2.4 percent in the third quarter, up from 0.7 percent growth in prior three months. Business spending rose 16.3 percent as companies invested in equipment, software, and non-residential building. However, inventories rose only $5.4 billion because companies failed to anticipate more robust demand. GDP growth would have been more than a percentage point higher without that inventory drag, offering hope for further upside in the months ahead if companies boost production to keep pace with sales.
The stock markets, which have already seen a dramatic jump this month, soared again after the GDP data was released — though the gains may also have been in response to the crucial deal reached in Europe to reduce Greek debt. After rocketing more than 200 points higher to open trading, the Dow Jones Industrial Average is on pace for its best October ever, according to CNBC. The S&P 500 appears headed for its best monthly gain since January 1987.
Still, the new data wasn’t completely rosy. “Before we break out the Champagne glasses, there are still reasons to be cautious about growth next year,” Bank of America Merrill Lynch economist Michelle Meyer wrote in a note to clients.
Personal income fell 1.7 percent, according to Thursday's Commerce Department report — the largest such decline in two years, suggesting that consumers can’t be counted on to sustain the recovery well into 2012. “With incomes down, consumer spending only accelerated because the saving rate dropped by a full percentage point,” IHS Global Insight Chief U.S. Economist Nigel Gault wrote in an emailed analysis. “That's not a solid foundation for growth.”
And modest 2.5 percent growth, while much better than forecast just weeks ago, is not strong enough to markedly improve the job market, where unemployment remains at 9.1 percent. Initial jobless claims for the week ending October 22 came in at 402,000, down from a revised 404,000 the week before. That stability in jobless claims, while welcome, is very different from actual payroll growth. “While the continued expansion is encouraging, faster growth clearly is needed to replace the jobs lost in the recent downturn and to reduce long-term unemployment,” said Katharine Abraham, a member of the Council of Economic Advisers, in a post on the White House blog. And IHS economist Gault wrote to clients: “With employment growth weak, debt levels still high, consumer sentiment still very negative, and housing still bumping along the bottom, we can't expect the consumer to be a strong driver of recovery."
Economists are also eyeing Washington for signs of what’s to come in 2012. Fiscal tightening and policy uncertainty could still lead to lower growth, some warn. For example, if Congress fails to extend the emergency benefits being collected by millions of unemployed workers, that could mean an additional $57 billion hit to personal income and a further headwind to consumer spending, Bank of America economists noted Thursday.
For now, though, economists are welcoming the signs of GDP growth and looking ahead with more optimism and less talk of recession. As Bank of America’s Meyer wrote: "Enjoy it while it lasts."