Oct. 27 (Bloomberg) -- The U.S. economy grew in the third quarter at the fastest pace in a year as Americans reduced savings to boost purchases and companies stepped up investment in equipment and software.
Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, up from 1.3 percent in the prior three months, Commerce Department figures showed today in Washington. Household purchases, the biggest part of the economy, increased at a 2.4 percent pace, more than forecast by economists.
The biggest drop in incomes in two years, along with declines in home prices and consumer confidence, cast doubt on whether the increase in spending can be sustained. Federal Reserve policy makers, who meet next week, and the Obama administration are considering additional measures to reduce an unemployment rate that has been stuck around 9 percent or higher for 30 months.
“There is some gain in momentum after a very weak first half,” said Robert Dye, chief economist at Comerica Inc. in Dallas, who correctly forecast the gain in GDP. “We need to get the jobs machine going and get the housing market moving in the right direction. The economy remains in a low-to-moderate growth mode, and that keeps us vulnerable.”
Stocks surged as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. The Standard & Poor’s 500 Index climbed 3.4 percent to 1,284.59 at the close of trading in New York, extending its biggest monthly rally since 1974. Treasuries fell, pushing the yield on the 10-year note up to 2.37 percent from 2.21 percent late yesterday.
An agreement by European leaders on steps that included recapitalizing the continent’s banks brought them closer to a resolution of the sovereign-debt crisis that Fed policy makers have identified as a risk to the U.S. economy.
Other data today showed that consumer confidence declined last week as Americans’ views of the economy sank to the lowest since the recession, and the number of contracts to purchase previously owned U.S. homes unexpectedly fell in September.
The Bloomberg Consumer Comfort Index dropped to minus 51.1 in the week ended Oct. 23, the lowest in a month, from minus 48.4 the prior period. Ninety-five percent of those surveyed had a negative opinion about the economy, the worst since April 2009 and one percentage point shy of a record high.
The National Association of Realtors said its index of pending home sales fell 4.6 percent, the biggest decline since April. Economists forecast a 0.4 percent gain, according to the median of 38 estimates in a Bloomberg News survey.
The increase in consumer spending last quarter followed a 0.7 percent gain in the previous period and exceeded the 1.9 percent median forecast in a Bloomberg News survey. Purchases added 1.7 percentage points to growth.
Consumers lowered the pace of saving as incomes declined, the report showed. The savings rate last quarter dropped to 4.1 percent, the lowest since the last three months of 2007. After-tax incomes adjusted for inflation decreased at a 1.7 percent annual rate, the biggest drop since the third quarter of 2009.
McDonald’s Corp., the world’s biggest restaurant chain, is among companies trying to keep prices down to attract budget-conscious customers. The Oak Brook, Illinois-based company this month said third-quarter profit gained 8.6 percent.
“The environment out there is still fragile,” James Skinner, McDonald’s vice-chairman and chief executive officer, said in an Oct. 21 call with analysts. “Consumers everywhere continue to be cautious and hesitant to spend.”
Gross domestic product surpassed its pre-recession peak for the first time. The 15 quarters it took to reach that milestone compares with an average of five quarters it has taken to recover from previous post-war recessions.
While the expansion is “encouraging,” faster growth is needed “to replace jobs lost in the recent downturn,” Katharine Abraham, a member of the White House Council of Economic Advisers, said in a blog posting.
The economy expanded at an average 0.9 percent rate in the first half of 2011, the worst performance since the recovery began in June 2009. Growth needs to exceed 2.5 percent to reduce the jobless rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.
One bright spot is business investment. Corporate spending on equipment and software climbed at a 17.4 percent pace, the most in a year. It contributed 1.2 percentage point to growth.
“We are starting to see our customers resume their investment activity,” Richard S. Hill, chairman and chief executive officer at San Jose, California-based Novellus Systems Inc., a maker of machinery used in semiconductor production, said on a conference call with analysts yesterday.
A rush to qualify for a larger government credit may be contributing to the increase. The Obama administration’s tax compromise allows companies to depreciate 100 percent of investment in capital outlays in 2011 and 50 percent in 2012.
“A lot of the strength is being driven by tax incentives,” said Aneta Markowska, a senior U.S. economist at Societe Generale in New York.
The pickup in investment didn’t translate into more jobs. Payrolls rose by an average 96,000 workers per month last quarter, down from the 166,000 average in the first quarter.
A Labor Department report today showed that fewer Americans filed applications for unemployment assistance last week, signaling limited improvement in the labor market.
First-time jobless claims decreased by 2,000 to 402,000 in the week ended Oct. 22. The number of people collecting unemployment benefits fell in the prior week by 96,000 to 3.65 million, the fewest since September 2008.
President Barack Obama proposed last month a $447 billion plan to stimulate jobs, which included expanding a payroll tax break due to expire at the end of this year, increasing spending on public works and extending jobless benefits.
Obama yesterday said he is seeking ways to take action without congressional approval after the Senate blocked the measure earlier this month. The steps include altering a program to help homeowners refinance mortgages and easing the burden of student loans.
Fed policy makers are developing options for further monetary easing even as the economy picks up.
Vice Chairman Janet Yellen said last week that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”
Policy makers pledged in August to hold the benchmark interest rate near zero at least through the middle of 2013 so long as joblessness stays high and the inflation outlook is “subdued.” On Sept. 21, they announced a plan to replace debt in the central bank’s portfolio with longer-term Treasuries to help cut borrowing costs.
Companies also kept a tight rein on stockpiles last quarter, making it less likely that production will have to be cut back. Inventories were rebuilt at a $5.4 billion annual pace, down from the second quarter’s $39.1 billion rate. The reduction subtracted 1.1 percentage points from GDP growth.
Excluding inventories, the economy grew at a 3.6 percent annual rate last quarter, up from a 1.6 percent in the April through June period.
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