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Economy grows at 2 percent in third quarter

- Associated Press - Friday, October 29, 2010

WASHINGTON (AP) — The economy grew slightly faster last summer as Americans spent a little more freely. Yet it remains too weak to reduce high unemployment just as Democrats face deep losses in Tuesday's elections.

The Commerce Department said Friday that the economy expanded at a 2 percent annual rate in the July-September quarter. It marked an improvement from the feeble 1.7 percent growth in the April-June quarter.

Consumers helped boost last quarter's economic growth with 2.6 percent growth in spending. That was better than the second quarter's 2.2 percent growth rate and marked the biggest quarterly increase since a 4.1 percent gain at the end of 2006 before the recession hit.

A stock-market rebound made people feel better about spending. Bargains, on everything from cars to home furnishings, also drew them out. Consumer spending accounts for roughly 70 percent of national economic activity, and thus plays a major role in determining the vigor of the economic rebound.

But to have any impact on the 9.6 percent unemployment rate, consumers need to spend even more and the economy would need to rack up growth of 5 percent for a full year.

"We're just muddling along," said Ken Mayland, president of ClearView Economics. "I think it is going to be hard to break out of this sluggish-growth rut."

The government's latest snapshot of the country's economic health comes just days before Americans go to the polls to elect a new Congress. Angry voters could cost Democrats control of the House, and maybe the Senate. The fragile economy means Americans with jobs are seeing scant wage gains and those without are facing fierce competition for the few openings that become available. Home foreclosures have soared.

To strengthen the economy, the Federal Reserve is all but certain to launch a new aid program next week. It is likely to start buying government bonds again in a bid to make loans cheaper and spur people to spend more. Doing so would help economic growth.

Businesses also played a role in the economy's slightly better performance during the July-September quarter.

They boosted spending on equipment and software at a 12 percent annualized rate, although that was roughly half the pace seen in the prior quarter. And companies increased spending on commercial construction projects, such as office buildings and factories, for the first time in more than two years. Such spending grew at a 3.9 percent pace in the July-September quarter.

However, companies slashed spending on housing projects last quarter at an annualized pace of nearly 30 percent. That followed a big burst of spending in the April-June quarter, which was supported by the government's now-expired homebuyer tax credit.

The housing market, which led the country into recession, remains a weight on the economy.

The nation's trade deficit also restrained growth last quarter, although not by as much as in the prior three months.

With consumers spending more, they socked less into their savings. They saved 5.5 percent of their disposable income in the July-September quarter, down from 5.5 percent in the April-June quarter. That's still a high savings rate. Before the recession, people saved only about 1 percent of their disposable income.

Growth in the October-December quarter isn't expected to improve much. A new AP Economy survey estimates a 2.4 percent pace.

If that's that case, the economy will end 2010 on weaker footing than it started. In the January-March quarter, the economy expanded at a 3.7 percent pace.

Even if the Fed's plan works, economists said it is likely to provide only a modest boost to economic growth, perhaps a couple tenths of a percentage point in the final quarter of this year. Still, the extra economic activity wouldn't be sufficient to drive down unemployment, economists said. The rate is still expected to be above 9 percent by the end of this year, even with Fed aid.

Under one rule of thumb, the economy would need to expand by 5 percent for a full year to knock the jobless rate down by a full percentage point.

For all of this year, the economy is expected to grow 2.6 percent. That would mark an improvement from 2009. The gross domestic product shrank that year by an equal amount, the largest annual decline since 1946. GDP measures the values of all goods and services — from machinery to manicures — produced in the United States.

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