The U.S. economy has climbed out of a mid-year rut – but only just – as growth remains too slow to reduce America's high unemployment rate in any material way.
Gross domestic product advanced at an annual pace of 2 per cent in the third quarter, a better showing than the second-quarter rate of 1.3 per cent, according to Commerce Department estimates released Friday in Washington.
The third-quarter reading was marginally better than expected by many economists, who had projected growth of 1.8 per cent, according to surveys. But the U.S. economy must expand at an annual pace of 3 per cent or more over a significant period to materially lower the 7.8-per-cent unemployment rate.
The boost in economic growth came from a surprising source: Government spending. The federal government's inflation-adjusted spending surged by 9.6 per cent in the third quarter, compared to a 0.2-per-cent decline in the second quarter, led by a sharp 13-per-cent increase in defence spending.
That will cause many to question the underlying strength of the economy's forward momentum. The federal deficit has breached $1-trillion (U.S.) for several years, and both presidential candidates say they will curtail spending to keep an already hefty debt burden from getting heavier.
Inflation-adjusted spending by states and municipalities decreased by 0.1 per cent in the third quarter after dropping 1 per cent in the previous quarter. That's probably more representative of the contribution to GDP governments will make over the next couple of years, economist said.
"The large contribution from government (in the third quarter) is a concern in the detail" of Friday's GDP estimate, Andrew Grantham, an economist at CIBC World Markets, said in a note to clients.
Growth of 2 per cent won't alter the Federal Reserve's plans to keep interest rates low for several years, as growth at that speed still is shy of the rate policy makers believe the U.S. economy can set without stoking inflation. And with more than half of the people who lost their jobs in the recession still unemployed, the Fed actually would like the economy to exceed its speed limit for several quarters, if not longer.
There was evidence in the GDP report that the Fed's extraordinary policy measures to keep borrowing costs low are having some effect. Residential investment jumped 14.4 per cent, following a gain of 8.5 per cent the previous quarter. Personal consumption rose 2 per cent, led by stronger automobile sales.
For businesses, the situation is different. Low interest rates can do only so much to offset the uncertainty of political gridlock in Washington, a recession in Europe and weaker demand in Asia.
Non-residential fixed investment decreased 1.3 per cent in the third quarter, the first decline in a year-and-a-half, which analysts attributed to angst over how politicians will resolve the so-called fiscal cliff, a combination of tax increases and spending cuts set for 2013 that is so large it likely would trigger a recession.
Exports, which helped pull the U.S. out of recession, decreased 1.6 per cent in the third quarter after increasing 1.6 per cent in the second quarter.
"In short, growth was better than in the (second quarter) but still very sluggish," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.