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Economy in U.S. Grows at 2% Rate, More Than Forecast

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Photographer: Joe Raedle/Getty Images

A Chrysler sales consultant shows a Jeep Wrangler to a potential customer at the Hollywood Chrysler Jeep car dealership in Florida.

Economic growth in the U.S. was stronger than forecast in the third quarter, propelled by gains in consumer spending, defense outlays and homebuilding.

Gross domestic product, the value of all goods and services produced, rose at a 2 percent annual rate after climbing 1.3 percent in the prior quarter, Commerce Department figures showed today in Washington. The median forecast of 86 economists surveyed by Bloomberg called for a 1.8 percent gain.

“We are encouraged by the improvement we’re seeing in consumer spending and housing,” said Dean Maki, chief U.S. economist in New York for Barclays Plc, who correctly forecast the rate of growth. “These will be dominant themes in the fourth quarter too.”

Consumer confidence rose to a five-year high in October, another report today showed, suggesting that gains in spending can be sustained as the real-estate revival bolsters household finances. The administration of President Barack Obama used the GDP report to promote measures it says would strengthen the economy, such as hiring more teachers, while challenger Mitt Romney seized on it as evidence Obama’s polices have failed.

Most stocks fell, extending a weekly decline for the Standard & Poor’s 500 Index, as investors watched earnings reports. The S&P 500, down 2 percent so far in October, dropped 0.1 percent to 1,411.94 at the close in New York. Treasury securities rose, sending the yield on the benchmark 10-year note to 1.75 percent from 1.82 percent late yesterday.

Consumer Sentiment

The Thomson Reuters/University of Michigan final consumer sentiment index climbed to 82.6 this month, the highest since September 2007, from 78.3 in September. The median forecast of 60 economists surveyed by Bloomberg projected a reading of 83 compared with a preliminary figure of 83.1 issued earlier this month.

Forecasts for GDP ranged from 0.9 percent to 3.1 percent. The GDP estimate is the first of three for the quarter, with the other releases scheduled for November and December, when more information becomes available.

Consumer purchases, which make up about 70 percent of the world’s largest economy, grew at a 2 percent annual rate, up from a 1.5 percent second-quarter gain and compared with a 2.1 percent median forecast in the Bloomberg survey. Purchases added 1.4 percentage points to growth.

Lower gasoline prices and a drop in unemployment are helping to lift confidence.

The unemployment rate dropped to a three-year low of 7.8 percent in September from 8.1 percent in August. Payrolls rose 114,000 after climbing 142,000. Jobs data for October are due from the Labor Department on Nov. 2, four days before the election.

Retail Receipts

Retail sales in September and August had the best back-to- back showing since late 2010 as shoppers snapped up goods from cars to Apple Inc.’s iPhones. Target Corp. (TGT), the second-biggest U.S. discounter, was among chains topping analysts’ estimates for same-store sales last month.

Cars and light trucks sold at a 14.9 million annual pace in September, the strongest since March 2008, according to Ward’s Automotive Group. Chrysler Group LLC and General Motors Co. (GM) reported gains.

Today’s report showed the saving rate fell to 3.7 percent from 4 percent as spending outstripped the gain in pay. Disposable income adjusted for inflation rose at a 0.8 percent annual rate from July through September, the least since the end of 2011, after a 3.1 percent gain in the second quarter.

Residential construction increased at a 14.4 percent rate, up from an 8.5 percent gain in the prior period. The pickup in homebuilding added 0.3 percentage point to third-quarter GDP, in line with the average contribution during the first half of 2012.

Housing Demand

Mortgage rates driven to record lows by Federal Reserve asset purchases are stoking demand for housing. Americans bought new homes in September at the fastest pace in two years, Commerce Department figures showed two days ago. Demand was up 27.1 percent from a year ago.

The report will be the last reading on the state of the economy before Americans go to the polls next month.

“Today, we received the latest round of discouraging economic news,” Romney said in a statement. “Slow economic growth means slow job growth and declining take-home pay. This is what four years of President Obama’s policies have produced.”

Alan Krueger, chairman of the White House Council of Economic Advisers, called on Congress to pass legislation proposed by Obama.

White House

“President Obama has proposed to Congress a plan that would help state and local governments retain and hire teachers and first responders, would assist the construction sector and economy of tomorrow by rebuilding and modernizing our Nation’s infrastructure,” according to a statement from Krueger posted on the council’s website.

Spending by the federal government rebounded, led by a jump in defense outlays. It grew at a 9.6 percent rate, the most since the second quarter of 2010. Total public expenditures climbed at a 3.7 percent pace, the most in three years and restrained by a decrease at the state and local level.

Companies are bracing for the so-called fiscal cliff, the $607 billion in spending cuts and tax increases that are slated to take effect automatically next year unless Congress acts.

Corporate spending on equipment and software was unchanged, the weakest reading in three years, according to today’s report. Data yesterday showed orders for non-defense capital goods excluding aircraft, a proxy for future corporate spending on items like computers, engines and communications gear, stagnated in September and shipments fell.

Uncertain Future

“Executives don’t know what the future will hold, so they’re sitting on their hands,” said Scott Anderson, chief economist at Bank of the West in San Francisco, who correctly forecast third-quarter growth. “We’re seeing strength in areas that have been lagging, such as consumer spending and housing, while business investment is extremely weak.”

Companies are also cutting forecasts on slowing growth in Europe and Asia. The trade deficit expanded as exports dropped, subtracting 0.2 percentage point from third-quarter growth, today’s report showed.

Honeywell International Inc. (HON), a maker of turbochargers and cockpit controls, cut its annual sales estimate on weaker demand for aerospace parts and falling auto production in Europe.

‘Conservative Planning’

“Turning to 2013, the clarity on the macro side is still murky,” Honeywell Chief Executive Officer Dave Cote said on an Oct. 19 conference call with analysts. “There’s nothing out there to suggest anything but continued conservative planning at best.”

Caterpillar Inc. (CAT), the world’s largest maker of construction and mining equipment, this week projected sales growth for 2013 that would be slower than the prior three years. Production has been trimmed, with temporary shutdowns and dismissals to work through excess stockpiles, the Peoria, Illinois-based company said.

The rate of economic growth would have been stronger if not for the drought that affected crops in the Midwest. A drop in farm inventories subtracted 0.4 percentage point from third- quarter GDP after cutting 0.2 point in the prior period, the report showed.

Fed policy makers highlighted the advance in consumer spending and slowdown in business investment in the Oct. 24 statement after their meeting. They pledged to keep buying $40 billion in mortgage-backed securities a month in a bid to spur the three-year expansion and reduce joblessness.

“Economic activity has continued to expand at a moderate pace,” the Fed said. “Growth in employment has been slow, and the unemployment rate remains elevated.”

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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