Economy grew 2.5 pct. in Q3 as consumers rebound

WASHINGTON (AP) — A summer of modest economic growth is helping dispel lingering fears that another recession might be near. Whether the strength can be sustained, though, is far from clear.

Buoyed by a resurgent consumer and strong business investment, the economy expanded at an annual rate of 2.5 percent in the July-September quarter, the government said Thursday.

The expansion, the strongest quarterly growth in a year, came as a relief after anemic growth in the first half of the year and weeks of wild stock market shifts.

The economy must grow at nearly double the third-quarter pace to lower high unemployment, which has been near 9 percent for the more than two years since the recession officially ended.

And though consumer spending was triple the level of the second quarter, Americans earned less, on an inflation-adjusted basis, in the July-September period. That meant that many people financed their spending binges by cutting back on savings. Few economists think that can continue.

** FILE ** Roddy Morris polishes a tank at JV Northwest, a manufacturer of stainless steel vessels in Canby, Ore., on Tuesday, Aug. 30, 2011. (Associated Press)

Economists believe that growth in consumer spending, which accounts for about 70 percent of economic activity, will be restrained until incomes start growing at healthier levels. That is unlikely until hiring picks up.

Paul Ashworth, chief U.S. economist for Capital Economics, predicts that growth will cool off in the fourth quarter and next year.

Nonetheless, the report on U.S. gross domestic product, or GDP, sketched a more optimistic picture for an economy that only two months ago seemed destined for another recession.

And it was delivered on the same day that European leaders announced a deal in which banks would take 50 percent losses on Greek debt and raise new capital to protect against defaults on sovereign debt.

Stocks surged on the European deal and maintained their gains after the report on U.S. growth was released.

“This has been a morning of encouraging news,” said Jennifer Lee, a senior economist for BMO Capital Markets. “The fourth quarter may see some pullback in U.S. economic growth … but the positive details underlying the GDP report should help ease fears of a U.S. recession..somewhat.”

Consumers helped drive much of the growth. They spent at an annual rate of 2.4 percent. Many bought more furniture and clothing.

And spending on services rose 3 percent, the most in more than five years. Much of the gain was due to consumers paying more for health care and to cool their homes during an unseasonably hot summer.

Still, after-tax incomes adjusted for inflation fell at a rate of 1.7 percent in the summer. It was the biggest decline since the third quarter of 2009 — just as the recession was ending.

Businesses also helped boost third-quarter growth by stepping up their investment in equipment and software. That category surged 17.4 percent — nearly three times the rate from spring. They also invested more in building, a sign that some businesses could be expanding despite the sluggish economy.

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