U.S. Economy Grew 2% as Consumer Spending Rises

The U.S. economy expanded at a 2 percent annual rate in the third quarter and inflation cooled, underscoring the views of Federal Reserve policy makers who say more stimulus will be needed to spur growth.

The increase in gross domestic product matched the median forecast of economists surveyed by Bloomberg News and followed a 1.7 percent second-quarter gain, Commerce Department figures showed today in Washington. Other reports showed business activity increased this month and consumer confidence weakened.

Central bankers meeting next week are concerned growth is too slow to lower an unemployment rate stuck near 10 percent and are seeking ways to prevent a drop in prices that would hurt the recovery. Today’s report showed the inflation gauge watched by the Fed rose the least in almost two years as retailers like Wal-Mart Stores Inc. use discounts to entice consumers into spending.

“We need to do better than this to get a real recovery in the labor market,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The report leaves everything in place for more asset purchases by the Fed next week.”

Treasury securities and commodities rose as the data fueled speculation the Fed will begin large-scale asset purchases to revive the world’s largest economy. The yield on the benchmark 10-year note, which moves inversely to prices, fell to 2.62 percent at 12:06 p.m. in New York. Stocks fluctuated between gains and losses.

Chicago Purchasers

The Institute for Supply Management-Chicago Inc. said its business barometer rose to 60.6 this month from 60.4 in September. Figures greater than 50 signal expansion. The Thomson Reuters/University of Michigan final index of consumer sentiment fell to 67.7 from 68.2 last month.

Employment expenses rose less than forecast in the third quarter, reinforcing expectations that inflation will be restrained in coming months, figures from the Labor Department also showed. The 0.4 percent increase in the employment cost index was the smallest gain this year, reflecting a record decline in pay for state and local government workers.

The growth report showed the so-called core personal consumption expenditures price index, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.8 percent pace, down from a 1 percent gain the prior quarter.

GDP projections of the 83 economists surveyed ranged from 0.5 percent to 3.6 percent.

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.

Spending Pickup

The gain in consumer spending was the biggest since the end of 2006 and compared with a 2.5 percent median forecast in the Bloomberg survey.

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.

‘Steady and Solid’

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. Inflation remains below its longer- term projections which are in a range of 1.7 percent to 2 percent. 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.

Voter Discontent

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.

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

Ford’s Plans

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 growth over the past three months, today’s report showed.

Final sales to domestic purchasers, which excludes trade and inventories and is 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.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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