GDP grows a modest 2% in 3rd quarter

The American economy is showing a little more pep in its step, the government reported Friday, but not enough to help bring down high unemployment or put the country on the road to sustained and widespread prosperity.

The nation’s gross domestic product — the total value of goods and services produced inside U.S. borders — grew at a modest annual rate of 2% in the third quarter, up from 1.7% in the second quarter, the Commerce Department said.

Even though the United States is at least technically in the process of recovering from the worst recession in decades, the slow growth rate, high unemployment, the devastated housing market and widespread uncertainty over the future have seeded clouds of political resentment that shadow next Tuesday’s congressional elections — especially for Democrats, who control both Congress and the White House.

“The most striking thing about today’s report on gross domestic product is that it shows that the U.S. economy is still smaller today than it was when the recession began — even more than a year after the recession officially ended,” said economist Josh Bivens of the Economic Policy Institute, a Washington think tank.


“This remains an historically slow recovery. Never since World War II has it taken so long to recover to pre-recession levels of GDP,” he said.

Stronger private spending powered the latest gain, an encouraging sign as retailers head into a crucial holiday season. “Consumers look a little more willing to spend,” said Shawn DuBravac, chief economist for the Consumer Electronics Assn. in Arlington, Va.

Business investment, too, was solid in the July-to-September period. Companies’ spending on equipment and software again rose by double digits, although at a slower pace than in the second quarter, and investment in offices and other commercial buildings posted the first upturn after eight straight quarters of decline.

What’s more, federal government expenditures continued to add juice to GDP growth.


So why wasn’t U.S. economic output stronger than 2%?

In a word, imports.

Although American exports were up in the quarter, imports rose at an even faster clip. And the resulting trade deficit, in effect, amounted to a halving of the GDP growth rate in the third quarter.

“It does say that we continue to basically consume more than we produce,” said economist Lynn Reaser, president of the National Assn. for Business Economics.


Exports are helping boost overall GDP, she said, and imports by themselves are not a bad thing, as their growth reflects stronger American demand. But, she added, “We’ve got to do something about the trade deficits.”

Foreign trade and jobs have become a dominant campaign topic in the run-up to Tuesday’s elections, and President Obama will depart next Friday for an Asia trip that includes the Group of 20 large economies’ summit in Seoul and other meetings aimed at opening up foreign markets and boosting American sales overseas that would ultimately create more jobs at home.

Obama referred to the latest GDP report Friday during a visit to a metal shop in Beltsville, Maryland, where he spoke about the economy and boasted of cutting taxes 16 times for small businesses.

“Instead of providing tax breaks for companies that are shipping jobs overseas, we’re giving tax breaks to encourage companies to invest right here in the United States of America — in small businesses, in clean energy firms, in manufacturers, in businesses like this one,” he said at Stromberg Metal Works.


The president then renewed his push for a proposal for accelerated tax write-offs for business investments for equipment.

“The reason this company is able to compete against low-wage countries, against non-union workforces, is because it’s got better equipment and it’s got more skilled, better workers,” he said.

Friday’s economic report isn’t likely to change companies’ outlook for the economy or give them more reason to beef up hiring. The GDP data were in line with expectations, painting a picture of an economy that isn’t facing as big a threat anymore of falling back into recession but that is nonetheless plodding along at an unsatisfactory speed.

“The pace of growth is still too weak to get a real recovery in the labor market … and that’s the key ingredient to a sustained recovery that’ll lead to more consumer spending and more support for the housing market,” said David Regan, a senior investment specialist at JPMorgan Private Wealth Management in Los Angeles.


“We are seeing better spending data especially for higher income” households, he said. “What we’d like to see is that spreading” to other groups.

The latest GDP figures reinforced widely held expectations that the Federal Reserve on Wednesday will announce a new round of government bond purchases to drive down long-term interest rates and stimulate economic activity.

Without knowing the size and other details of the expected stimulus, economists were divided on how much bang it might provide.

The hope is that it will spur more refinancing among homeowners and borrowing from businesses. And with the dollar weakening in expectation of a flood of new money, it should help U.S. exporters and the trade imbalance.


“It could be marginally helpful. We’re asking the Fed to do a lot,” said Paul Ballew, a former Fed economist and currently a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio.

Ballew and a number of other economists see economic growth ticking higher next year but still falling short of 3%. The jobless rate will only slowly trend downward, to about 9% by the end of 2011, from the current 9.6%.

“Things have gotten better from two years ago,” Ballew said, “but we’re probably on a five-year-long journey to restructure the economy — and it’s going to be bumpy.”

That certainly has been the case for retail sales, which have zigzagged this year, reflecting the uncertainty of the American consumer. Consumer spending accounts for about 70% of GDP, and the latest third-quarter growth of 2.6%, up from 2.2% in the second quarter, was heartening.


But “households had to dip into their savings to afford that increase,” said Paul Ashworth, a senior U.S. economist at Capital Economics in Toronto, because after-tax incomes grew by only 0.5% in the third quarter. The personal saving rate dropped to 5.5% from 5.9% in the second quarter.

“Unless income growth picks up, which isn’t going to happen until we see much stronger job growth, there is little reason to believe that even this slightly faster pace of consumption growth is sustainable,” Ashworth said in a research note.

The National Retail Federation was a little more sanguine — at least for the immediate future.

The Washington-based group is forecasting holiday retail sales to grow 2.3% this year, versus a 0.4% increase in 2009 and a drop of 3.9% in 2008. Retailers have bulked up hiring in anticipation of stronger sales, with jewelry and gift cards projected to sell particularly well compared with last year, said spokeswoman Kathy Grannis.


“We’re expecting people to get out there and invest in real gifts again,” she said.

Although third-quarter growth was above the second quarter’s 1.7%, it still marked a decline from the 3.25% increase in the second half of last year. And most economists believe GDP needs to expand to above 2.5% for some time to make a significant dent in the near-double-digit unemployment rate.