US economy steps up pace, but still sluggish

The US economy perked up in the third quarter, led by a government spending surge, but remains stuck in the doldrums, official data released Friday showed.

The world's largest economy grew at a 2.0 per cent annual rate in the July-September quarter following the second quarter's slump to 1.3 per cent, the Commerce Department said.

But the pace of expansion in gross domestic product (GDP) -- a measure of the nation's goods and services output -- was modest, and only half that seen in the final quarter of 2011.

A 13 per cent jump in defense spending, which tends to be volatile, and better consumer spending and housing investment propelled growth.

That was offset in part by the effects of the severe drought in the Midwest on farm inventories, flat business investment and shrinking exports.

"The report provides nothing to suggest that US activity is breaking out of the modest growth environment in either a positive or negative direction," Barclays analyst Peter Newland said.


The department's first estimate for the quarter was slightly stronger than the 1.9 per cent expected by most analysts. Typically the preliminary GDP number is revised two more times as more data become available.

The slightly better-than-expected reading came just 11 days ahead of the November 6 presidential election, with President Barack Obama and Republican nominee Mitt Romney locked in a tight race.

The weak economy and high unemployment -- at 7.8 per cent in September -- are uppermost in voters' minds as they head to the polls.

As expected, both sides pounced on the news.

"Slow economic growth means slow job growth and declining take-home pay. This is what four years of President Obama's policies have produced," Romney said.

"Americans are ready for change -- for growth, for jobs, for higher take-home pay. Paul Ryan and I will deliver it," he said, referring to his vice presidential running mate.

The White House pointed out the report shows the 13th straight quarter of GDP growth.

"While we have more work to do, together with other economic indicators, this report provides further evidence that the economy is moving in the right direction," said Alan Krueger, chairman of the president's Council of Economic Advisers.

Josh Bivens at the Economic Policy Institute highlighted that the third-quarter pace was roughly the same rate the economy has been growing since the beginning of 2010.

"Growth rates this low will not reliably lower joblessness in the years to come. Whichever candidate wins the presidential race will face an economy needing powerful and sustained policy actions to restore it to full health," he said.

IHS Global Insight's chief US economist, Nigel Gault, said the economy has only weak forward momentum and forecast 1.5-2.0 per cent growth in the fourth quarter.

"Uncertainty at home and abroad is holding back the business sector. How quickly those uncertainties clear up -- especially over domestic fiscal policy -- will determine how quickly the overall growth rate can pick up," he said.

Headline consumer prices rose 1.5 per cent in the third quarter, led by energy prices, but core inflation, stripping out food and energy, moved little at 1.3 per cent.

"This is still not the stable recovery the Federal Reserve is looking for, as noted at their policy meeting this past week." said Christopher Vecchio, a currency analyst at DailyFX.

Vecchio predicted the Fed would step up asset purchases when Operation Twist finishes in two months and announce at its December meeting further stimulus measures.

The central bank's Federal Open Market Committee confirmed Wednesday its commitment to the six-week-old QE3 stimulus, saying the US economy still needed the support of its easy money programs.

If the country's high unemployment situation does not improve "substantially," the FOMC said it would continue the existing program, add other asset purchase operations and employ other monetary tools to boost the economy.