Economy in U.S. Expands 2.6% in Quarter; Price Rise Is Slowest in 50 Years

The U.S. economy grew less than forecast in the third quarter and inflation unexpectedly cooled, highlighting why the Federal Reserve plans to keep pumping money into financial markets.

The revised 2.6 percent increase in gross domestic product compares with a 2.5 percent estimate issued last month and was less than the median forecast of a 2.8 percent in a Bloomberg News survey, a Commerce Department report showed today. Consumer costs for goods and services, excluding food and fuel, climbed at the slowest pace since records began in 1959.

Growth hasn’t been strong enough to cut unemployment or prevent prices from stagnating, evidence of what the central bank this month called “disappointingly slow” progress. The Fed’s commitment to buy another $600 billion in Treasury notes, combined with additional government stimulus and an improving labor market may help accelerate household spending.

The lack of “inflation does remain the biggest downside risk to the U.S. economy” and growth “is not enough to move unemployment meaningfully,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

A report today from the National Association of Realtors showed sales of existing homes rose less than forecast in November as the industry that triggered the worst recession in seven decades struggled to recover after a government tax credit ended.

Purchases increased 5.6 percent from the prior month to a 4.68 million annual rate. Economists projected sales would rise to a 4.75 million pace, according to the median forecast in a Bloomberg survey.

Growth Picks Up

GDP projections ranged from gains of 2.5 percent to 3.3 percent, according to the Bloomberg survey of 71 economists. Today’s report is the third and final for the quarter. The world’s largest economy grew at a 1.7 percent pace in the previous three months.

Stocks climbed. The Standard & Poor’s 500 Index, which yesterday completed its recovery from the collapse of Lehman Brothers Holdings Inc. in September 2008, rose 0.3 percent to 1,258.56 at 12:47 p.m. in New York.

In the past two weeks, economists have boosted forecasts for fourth-quarter growth after the government reported better- than-projected retail sales for November and the Obama administration reached a compromise with congressional Republicans to extend tax cuts put in place by former President George W. Bush.

JPMorgan Chase & Co. chief U.S. economist Michael Feroli on Dec. 14 revised his fourth-quarter growth estimate to a 3.5 percent pace from a prior estimate of 2.5 percent.

Jobless Rate

The economy hasn’t been growing fast enough to bring down the unemployment rate, currently at 9.8 percent and a concern of Fed policy makers. The central bank’s Open Market Committee on Dec. 14 repeated its pledge to leave the benchmark interest rate low for an “extended period” and retained a Treasury-purchase program through June.

Inflation is also lower than the policy makers’ long-term forecast. The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, rose at a record-low 0.5 percent annual pace, today’s report showed.

In their statement this month, Fed officials said inflation measures “have continued to trend downward.”

Today’s report showed consumer spending rose at a 2.4 percent pace last quarter, the fastest since the first three months of 2007, while less than the 2.8 percent estimated last month. The revision reflected less spending on health-care and financial services.

Spending Accelerates

Household spending figures for November, due tomorrow, may show a 0.5 percent gain following a 0.4 percent increase in October, according to the Bloomberg survey median.

Ford Motor Co., the world’s most profitable automaker, said Dec. 20 that U.S. auto sales in December are running at a 12 million unit annual rate, the third straight month at that pace or faster.

Dearborn, Michigan-based Ford forecast sales to rise to almost 13 million next year. Its U.S. sales rose 21 percent in this year’s first 11 months, led by deliveries to fleet customers. The company expects retail customers to support next year’s gains, said George Pipas, Ford’s sales analyst.

“We have a high degree of confidence that 2011 is going to be a stronger sales year,” Pipas, said in a briefing with reporters. “We’re a whole lot better off than we were a year ago.”

A bigger gain in inventories added more to growth than the Commerce Department estimated last month.

The need to restock inventories, a major driver of the economic recovery, may diminish in coming months as companies try to keep stockpiles more in line with demand.

Excluding trade and inventories, a measure of underlying demand, the economy would have grown at a 2.6 percent annual rate after expanding 4.3 percent in the second quarter. The Commerce Department last month estimated a 2.9 percent pace of so-called final sales to domestic purchasers in the third quarter.

Corporate profits increased 1.6 percent from the previous three months, revised from the 2.8 percent gain estimated in November, today’s report showed. They were up 26 percent from the same period a year earlier.

To contact the reporters on this story: Timothy R. Homan in Washington at thoman@bloomberg.net; Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

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

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