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U.S. Economy Expanded at 2.6% Pace in Third Quarter

By Timothy R. Homan and Courtney Schlisserman
(c) 2010 Bloomberg News
Wednesday, December 22, 2010; 8:55 AM

Dec. 22 (Bloomberg) -- The U.S. economy expanded at a 2.6 percent annual rate in the third quarter, marking a pickup in growth that may extend into 2011 as companies and consumers gain confidence to spend.

The revised increase in gross domestic product compares with a 2.5 percent estimate issued last month and was less than the median forecast of a 2.8 percent in a Bloomberg News survey, figures from the Commerce Department showed today. Inventories rose more than initially reported, while the rise in household purchases was revised down.

Growing incomes, the continuation of Bush-era tax cuts and an improving labor market may encourage Americans to boost their spending, which accounts for about 70 percent of the world's largest economy. Today's figures showed a measure of inflation rose at the slowest pace in more than 50 years, underscoring the Federal Reserve's strategy of extending record monetary stimulus.

Today's figures set the stage for "a stable pace of growth" in 2011, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. The lack of "inflation does remain the biggest downside risk to the U.S. economy" and GDP expansion at this rate "is not enough to move unemployment meaningfully," he said.

Economists' projections ranged from gains of 2.5 percent to 3.3 percent, according to the Bloomberg survey of 71 economists. Today's report is the third and final for the quarter after a 1.7 percent pace in the previous three months.

Stock-index futures fluctuated after the report. The March contract on the Standard & Poor's 500 Index rose less than 0.1 percent to 1,251 at 8:49 a.m. in New York. Treasuries were little changed, with the benchmark 10-year note yielding 3.31 percent, the same as late yesterday.

In the past two weeks, economists have boosted forecasts for fourth-quarter growth after the government reported better-than- projected retail sales for November and the Obama administration reached a compromise with congressional Republicans to extend tax cuts put in place by former President George W. Bush.

JPMorgan Chase & Co. chief U.S. economist Michael Feroli on Dec. 14 revised his fourth-quarter growth estimate to a 3.5 percent pace from a prior estimate of 2.5 percent.

The economy hasn't been growing fast enough to bring down the unemployment rate, currently at 9.8 percent and a concern of Fed policy makers. The central bank's Open Market Committee on Dec. 14 repeated its pledge to leave the benchmark interest rate low for an "extended period" and retained a $600 billion Treasury-purchase program through June.

Inflation is also lower than the policy makers' long-term forecast. The Fed's preferred price gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 0.5 percent annual pace, the slowest since record-keeping began in 1959, today's report showed.

In their statement last week, Fed officials said inflation measures "have continued to trend downward."

Today's report showed consumer spending rose at a 2.4 percent pace last quarter, the fastest since the first three months of 2007, while less than the 2.8 percent estimated last month. Spending added 1.67 percentage points to GDP from July through September.

Household spending figures for November, due tomorrow, may show a 0.5 percent gain following a 0.4 percent increase in October, according to the Bloomberg survey median.

Ford Motor Co., the world's most profitable automaker, said Dec. 20 that U.S. auto sales in December are running at a 12 million unit annual rate, the third straight month at that pace or faster.

Dearborn, Michigan-based Ford forecast sales to rise to almost 13 million next year. Its U.S. sales rose 21 percent in this year's first 11 months, led by deliveries to fleet customers. The company expects retail customers to support next year's gains, said George Pipas, Ford's sales analyst.

"We have a high degree of confidence that 2011 is going to be a stronger sales year," Pipas, said in a briefing with reporters. "We're a whole lot better off than we were a year ago."

A bigger gain in inventories added more to growth than the Commerce Department estimated last month.

The need to restock inventories, a major driver of the economic recovery, may diminish in coming months as companies try to keep stockpiles more in line with demand. The value of unsold goods rose $121.4 billion in the third quarter, up from a previously reported $111.5 billion.

The trade gap was revised to $505 billion from $506.7 billion, today's report showed. The deficit subtracted 1.7 percentage points from growth.

Excluding trade and inventories, a measure of underlying demand, the economy would have grown at a 2.6 percent annual rate after expanding 4.3 percent in the second quarter. The Commerce Department last month estimated a 2.9 percent pace of so-called final sales to domestic purchasers in the third quarter.

Corporate spending on new equipment as well as export demand will support production. Business purchases of equipment and software rose at a 15.4 percent pace last quarter, revised from 16.8 percent and following a 24.8 percent jump for the second quarter that was the biggest in 27 years. Spending on structures including office buildings and factories fell 3.5 percent.

"We have seen now an extended period of time of recovery in the components business," Paul Reilly, chief financial officer of Arrow Electronics Inc., said earlier this month at a conference in New York. Melville, New York-based Arrow is a distributor of electronic components and computer products to industrial customers.

Corporate profits increased 1.6 percent, revised from the 2.8 percent gain estimated last month, today's report showed. They were up 26 percent from the same period a year earlier.

© 2010 bloomberg.com