Tags: Economy Picked Up in Third Quarter on Consumer Spending

Economy Grew at 2 Percent Rate on Consumer Spending

Friday, 29 October 2010 08:34 AM

The U.S. economy grew at a 2 percent annual rate in the third quarter as consumer spending climbed the most in almost four years, a sign the expansion is developing staying power.

The increase in gross domestic product matched the median forecast of economists surveyed by Bloomberg News and followed a 1.7 percent gain the prior three months, Commerce Department figures showed today in Washington. Household purchases, about 70 percent of the economy, rose at a 2.6 percent pace, the best quarter of the recovery that began in June 2009.

The figures, the last economy-wide gauge before voters head to the polls on Nov. 2, show growth remains short of what’s needed to cut a jobless rate stuck near 10 percent. The report also indicated inflation cooled as retailers like Wal-Mart Stores Inc. cut prices, one reason why Federal Reserve policy makers next week may pump more money into the world’s largest economy.

“Consumer spending looks considerably better,” Jim O’Sullivan, chief economist at MF Global Ltd. in New York, said before the report. At the same time, “it’s pretty clear the Fed will do more as they’re trying to get above-trend growth to reduce the unemployment rate.”

Projections of 83 economists in the survey ranged from 0.5 percent to 3.6 percent.

The GDP estimate is the first of three for the quarter, with revisions in November and December when more information becomes available.

More Spending

The gain in consumer spending, the biggest since the end of 2006, compared with a 2.5 percent median forecast in the Bloomberg survey and followed a 2.2 percent increase the prior quarter. Purchases added 1.8 percentage points to growth.

Stock-market gains and reduced debt may be allowing consumers to increase spending, which bodes well for the holiday season. The National Retail Federation has forecast November- December sales will rise 2.3 percent from a year ago, making it the best holiday season in four years.

Wal-Mart, the world’s largest retailer, Target Corp., Amazon.com Inc. and EBay Inc. are among merchants that will benefit as holiday shoppers seek bargains, according to results of a survey issued this month by Consumer Edge Research in Stamford, Connecticut.

Target, the second-biggest discount retailer, said this month it would lower prices on more than 1,000 toys to attract shoppers. Its larger rival responded with its own discounts, advertising saving on brands such as Barbie and Nerf toys.

Taking Vacations

Miami-based Royal Caribbean Cruises Ltd., the world’s second-largest cruise operator, raised its 2010 profit forecast and predicted record earnings next year. Passenger bookings are rebounding since Chief Executive Officer Richard Fain slashed ticket prices and costs last year.

Demand is now “steady and solid,” Fain said in an Oct. 26 statement. “The economy is still tough, but even facing such headwinds, our outlook is remarkably encouraging.”

Fed Chairman Ben S. Bernanke said on Aug. 27 that the central bank “will do all that it can” to sustain the economic recovery. Investors are anticipating policy makers will announce another round of asset purchases after buying $1.7 trillion in debt from December 2008 to March.

The Fed meets Nov. 2-3 to consider steps to boost an economy growing too slowly and prevent inflation, which remains below its longer-term projections, from cooling even more. Growth in the 2.5 percent to 2.8 percent range is consistent with keeping the jobless rate stable, according to policy makers’ latest forecasts.

Less Inflation

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.8 percent annual pace, less than the median forecast and down from a 1 percent increase the prior quarter. The central bank’s longer term projection is a range of 1.7 percent to 2 percent.

The election next week will determine which party controls Congress. There is no clear consensus on which party deserves more blame for the economy’s problems, or how best to fix them, according to a Bloomberg National Poll conducted Oct. 24-26. It showed Republicans are poised to retake the U.S. House without a mandate from voters to carry out their policies.

In addition to consumer spending, third-quarter growth got a lift from a pickup in inventories and gains in business investment on equipment and software and federal government outlays. The economy may not be able to count on the latter much longer as about 70 percent of President Barack Obama’s estimated $787 billion stimulus has been spent, according to a September White House report.

Auto Production

Automakers were another bright spot last quarter. Vehicle production climbed at a 21 percent annual rate, adding 0.4 percentage point to growth.

Ford Motor Co., the second-largest U.S. automaker, plans to invest $850 million and add 1,200 jobs in Michigan by 2013 as sales rebound, the company said Oct. 25. It will add 900 hourly positions in its factories and 300 salaried jobs at its engineering and manufacturing operations, it said.

A pickup in auto demand may keep helping manufacturers. Vehicle sales are running at a 12 million annual rate in October, Mark Fields, Ford’s president of the Americas, said this month. The rate would be the highest since the government’s “cash for clunkers” incentive boosted demand in August 2009.

“We continue to see good, steady improvement,” Fields said on Oct. 25 at an event in Sterling Heights, Michigan.

A 29 percent plunge in home building, the biggest since the first quarter of 2009, and a widening trade gap hindered the world’s largest economy over the past three months, today’s report showed.

Excluding trade and inventories, a measure of underlying demand, the economy would have grown at a 2.5 percent annual rate after expanding at a 4.3 percent pace the previous three months.

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The U.S. economy grew at a 2 percent annual rate in the third quarter as consumer spending climbed the most in almost four years, a sign the expansion is developing staying power.The increase in gross domestic product matched the median forecast of economists surveyed by...
Economy Picked Up in Third Quarter on Consumer Spending
Friday, 29 October 2010 08:34 AM
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