GDP rises 2 percent, showing a slow but durable recovery

It turns out that the economy is an undecided voter, too.

Its middling growth does not greatly bolster President Obama’s argument that the economy is on the mend, nor does it let Republican presidential nominee Mitt Romney call the recovery a disaster.

The government’s report Friday on economic growth only deepened that muddle. It showed that the recovery gained momentum between July and September, but the rate of expansion remained slightly behind last year’s sluggish pace.

Political analysts are skeptical that the modest improvement will help Obama’s reelection prospects, with early voting already launched in many states and opinions of the candidates hardened. Even a substantial improvement in next week’s report on employment in October — the last snapshot of the economy before the Nov. 6 presidential election — may have little impact on voters.

“There is not much time left,” said Michael D. Ward, a Duke University political scientist. The government’s report “is an improvement. But people who are still unemployed won’t necessarily be moved by this, even if many people will think of this as a positive rather than a negative.”

The Commerce Department estimated that gross domestic product expanded at a 2 percent annual rate in the third quarter, a clear improvement over the
1.3 percent rate achieved in the previous three months. But growth remains too slow to substantially reduce the nation’s 7.8 percent unemployment rate.

The report parallels other data that show a still-weak but improving housing market and a labor market where unemployment remains high despite recent gains.

Aides to Obama noted that the GDP report marks more than three years of steady growth, which they called proof that the economy continues to strengthen.

“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 B. Krueger, chairman of the White House Council of Economic Advisers.

Romney pointed out Friday that economic growth has stagnated over the past year. The
1.74 percent annual growth rate for the first nine months of 2012 slightly lags 2011’s tepid 1.8 percent growth rate.

“Today, we received the latest round of discouraging economic news: Last quarter, our economy grew at only 2 percent, less than half the 4.3 percent rate the White House projected after passing the stimulus bill,” 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.”

GDP is the broadest measure of economic activity and aims to capture the value of all goods and services produced within the United States. Over time, changes in economic output determine whether the nation is becoming wealthier or poorer.

The new numbers offer a portrait of an American economy in transition, with some sectors showing newfound strength while others are fading.

Growth in the third quarter was driven largely by an increase in consumer spending, which increased at a 2 percent annual rate, up from 1.5 percent last spring. There were also strong gains in spending on automobiles, video and audio equipment, recreational vehicles and other durable goods.

The data also reflected the growing strength of the recovery in the nation’s long-beleaguered housing sector. The report showed a 14.4 percent annual rate of gain in residential investment.

The housing sector has now been in positive territory for six straight quarters, but it is coming off such a low level that even double-digit gains do not do much to improve overall growth levels. The sector’s rise in the third quarter translated to only a 0.33-percentage point contribution to the overall rate of economic growth.

At the same time, government spending spurred growth for the first time in nine quarters, the report showed.

The biggest contributor was a jump in defense spending, which expanded at a 13 percent annual rate. Analysts pointed out that defense expenditures often rise just before the end of the fiscal year in September and would likely prove unsustainable.

Non-defense federal spending rose at only a 3 percent annual pace.

State and local government spending, which has been contracting continuously since the start of 2010, was essentially flat in the past quarter. Coupled with a recent slowdown in layoffs in that sector, the report indicates that the biggest cuts in state and local governments could be over, at least for now.

Despite those gains, other parts of the economy slowed in the past quarter.

Exports fell at a 1.6 percent annual rate after rising every quarter for more than three years. The slowing global economy, particularly in Europe and China, was a major factor in the trade slowdown.

Imports were also down, but not as much. Overall, the trade imbalance subtracted more than 0.18 percentage point from overall economic growth.

In another worrisome sign, businesses seem to be holding onto cash and pulling back on capital investment, perhaps out of fear of the slowing global economy and the prospect of the “fiscal cliff” — tax hikes and automatic spending cuts that will take place next year unless Washington acts to head them off.

Business investment in buildings, factories and other structures fell at a 4.4 percent annual rate, while purchases of equipment and software were flat after having risen for 11 consecutive quarters. That result is consistent with Thursday’s weak report on orders of durable goods such as machinery.

“The recovery continues, but at an agonizingly slow pace,” said Bernard Baumohl, chief global economist of the Economic Outlook Group.

Health-care spending was also down for a second consecutive quarter. The only prior periods in which real spending in that sector declined in consecutive quarters were from the third quarter of 2009 to the first quarter of 2010 and in the 1981-82 recession, according to Dean Baker, co-director of the Center for Economic and Policy Research.

“Nominal health-care spending increased at just a 0.5 percent annual rate, the slowest growth since 1965,” Baker wrote. “While the weakness of the economy is almost certainly a factor in slowing growth, it is likely that we are seeing evidence of a slower growth path for spending. The implications of this for the economy and the budget debates will be enormous.”

Neil Irwin contributed to this report.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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