American economy expands at modest 2 percent pace

CHRISTOPHER S. RUGABER

AP Eco­nom­ics Writer

WASHINGTON — The lat­est snap­shot of eco­nomic growth shows the U.S. recov­ery remains tepid.

Growth in the July-September quar­ter climbed slightly but was still too weak to stir sig­nif­i­cantly more hir­ing. The pace of expan­sion rose to a 2 per­cent annual rate from 1.3 per­cent in the April-June quar­ter, led by more con­sumer and gov­ern­ment spending.

Vot­ers who are still unde­cided about the pres­i­den­tial elec­tion aren’t likely to be swayed by Friday’s mixed report from the Com­merce Department.

“For the aver­age Amer­i­can, I don’t think changes in quar­terly GDP” make a big dif­fer­ence in their per­cep­tion of the econ­omy, said Andrew Kohut, pres­i­dent of the Pew Research Cen­ter. “It’s cer­tainly good for the pres­i­dent that the num­ber is not bad because that would resonate.”

With 11 days until the elec­tion, the econ­omy is being kept afloat by a revi­tal­ized con­sumer and the early stages of a hous­ing recov­ery. But more than three years after the Great Reces­sion ended, the nation con­tin­ues to strug­gle because busi­nesses are reluc­tant to invest, and slower global growth has cut demand for Amer­i­can exports.

Repub­li­can nom­i­nee Mitt Rom­ney is telling vot­ers that Pres­i­dent Barack Obama’s poli­cies have kept the econ­omy from accel­er­at­ing and have even slowed growth in the past two years. The 1.7 per­cent annual growth rate for the first nine months of 2012 remains slightly behind last year’s 1.8 per­cent growth. And both are below 2010’s growth of 2.4 percent.

The econ­omy con­tracted at a 5.3 per­cent annual rate in the first three months of 2009, just as Obama took office dur­ing the worst down­turn since the Great Depres­sion. Obama says his poli­cies sta­bi­lized the econ­omy later that year and argues that the stim­u­lus pack­age and auto bailout helped it grow in 2010.

The White House points to an econ­omy that’s expanded for 13 straight quar­ters. Yet this year’s third-quarter growth is slightly below the 2.2 per­cent aver­age pace since the reces­sion ended in June 2009.

The economy’s health is most closely tied to con­sumers, whose spend­ing dri­ves 70 per­cent of eco­nomic activity.

The lat­est report showed some progress.

Con­sumer spend­ing rose at an annual rate of 2 per­cent in the July-September quar­ter, up from 1.5 per­cent in the pre­vi­ous quar­ter. And a sur­vey by the Uni­ver­sity of Michi­gan released Fri­day found con­sumer con­fi­dence increased to its high­est level in five years this month. That sug­gests spend­ing may keep growing.

Amer­i­cans spent more on cars, adding nearly 0.2 per­cent­age point to growth. Hous­ing added to growth for the sixth straight quarter.

“Those are the sec­tors that reflect grow­ing con­sumer con­fi­dence and greater lend­ing,” said Joseph Car­son, U.S. econ­o­mist for Alliance­Bern­stein, an asset man­age­ment firm.

Still, more jobs and bet­ter pay are needed to sus­tain that growth, he added. After-tax, inflation-adjusted income rose at only a 0.8 per­cent annual rate in the third quar­ter. That was down from a 3.1 per­cent rate in the pre­vi­ous quarter.

Income includes not only wages but also div­i­dends, rental income and gov­ern­ment or work­place ben­e­fits, among other items.

With busi­nesses ner­vous about the eco­nomic out­look, hir­ing isn’t likely to pick up soon.

Many com­pa­nies worry that their over­seas sales could decline fur­ther if reces­sion spreads through­out Europe and growth slows fur­ther in China, India and other devel­op­ing coun­tries. Busi­nesses also fear the tax increases and gov­ern­ment spend­ing cuts that will kick in next year if Con­gress doesn’t reach a bud­get deal.

That’s caused them to invest less in new build­ings and equip­ment. Busi­ness spend­ing on equip­ment and soft­ware was flat in the July-September quar­ter, the first quar­ter it didn’t increase since the recession.

“Uncer­tainty at home and abroad is hold­ing back the busi­ness sec­tor,” Nigel Gault, an econ­o­mist at IHS Global Insight, said in an email. “How quickly those uncer­tain­ties clear up … will deter­mine how quickly the over­all growth rate can pick up.”

One big dri­ver of growth was a sharp increase in defense spend­ing, which rose by the most in more than three years. That was likely a one-time boost.

Growth was held back by the first drop in exports in more than three years. It was also slowed by the effects of the drought that struck the Mid­west last sum­mer. The drought cut agri­cul­ture stock­piles and reduced the economy’s annual growth rate by nearly a half-point.

In a healthy econ­omy, growth between 2.5 per­cent and 3 per­cent is usu­ally suf­fi­cient to keep the unem­ploy­ment rate low. But the unem­ploy­ment rate is 7.8 per­cent. Growth needs to top 3 per­cent to gen­er­ate enough hir­ing to lower the rate steadily.

The government’s report cov­ers gross domes­tic prod­uct, which mea­sures the nation’s total out­put of goods and ser­vices — from restau­rant meals and hair­cuts to air­planes, appli­ances and high­ways. Friday’s was the first of three esti­mates of third-quarter GDP.

Ana­lysts were doubt­ful that the report would sway many unde­cided vot­ers in bat­tle­ground states.

Since the recov­ery began more than three years ago, the U.S. econ­omy has grown at the slow­est rate of any recov­ery in the post-World War II period. And econ­o­mists think growth will remain slug­gish at least through the first half of 2013.

Some ana­lysts believe the econ­omy will start to pick up in the sec­ond half of next year.

By then, econ­o­mists hope the tax and spend­ing con­fronta­tions that have brought grid­lock to Wash­ing­ton will be resolved. That could encour­age busi­nesses to invest and hire.

The Fed­eral Reserve’s con­tin­ued efforts to boost the econ­omy by low­er­ing long-term inter­est rates may also help by gen­er­at­ing more bor­row­ing and spend­ing by con­sumers and businesses.

But the econ­omy is still being slowed by con­sumers’ efforts to spend less, increase their sav­ings and pay off debts, econ­o­mists say. And banks remain cau­tious about lend­ing in the after­math of the finan­cial cri­sis. That’s why recov­er­ies after finan­cial crises are usu­ally weak.

“There’s just a real­ity here,” said Paul Edel­stein, an econ­o­mist at IHS Global Insight. “You don’t recover from these types of events as quickly as you’d like.”

Posted by AP News on Oct 26 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.