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Report: Economy Shows Modest Growth in 3Q

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October 27, 2011 by   Leave a Comment

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.

The Associated Press reported that buoyed by a resurgent consumer and strong business investment, the economy expanded at an annual rate of 2.5% in the July-September quarter, the government said Thursday (Oct. 27).

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% 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.

Economists believe that growth in consumer spending, which accounts for about 70% 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% 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.”

 

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