Economy grows at tepid 2 percent

Oct. 29 (Bloomberg) -- David Greenlaw, chief fixed-income economist at Morgan Stanley, talks about the outlook for U.S. economic growth, Federal Reserve monetary policy and Treasury yields. Greenlaw speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
By Neil Irwin
Washington Post Staff Writer
Friday, October 29, 2010; 12:53 PM

Economic growth accelerated a bit late this summer, according to new government data, even as the nation remained stuck in a pattern of expansion that is too slow to bring down joblessness.

Gross domestic product expanded at a 2 percent annual rate in the July-through-September quarter, the Commerce Department said Friday, matching economists' forecasts. That was a slight improvement from the 1.7 percent growth rate of the second quarter and the fifth straight quarter of expansion.

Spending by U.S. consumers, the largest component of GDP, spurred the uptick, rising in the third quarter to a 2.6 percent annual rate. The numbers also got a boost from business investment, federal government spending and businesses building inventories. International trade and the housing sector were both drains on economic growth.

President Obama, speaking in Beltsville during an event on jobs and the economy at the Stromberg Metal Works company, pointed to the GDP news as a promising sign for the economic recovery, but he stressed that growth needs to strengthen.

"As we continue to dig out from the worst recession in 80 years, our mission is to accelerate that recovery and encourage more rapid growth," Obama said, "so businesses can continue to prosper and we can put millions of Americans looking for jobs back to work."

He used the occasion to argue for a tax law change that would allow businesses to depreciate the value of new equipment immediately, which would create greater incentive to expand and invest, he said.

GDP is the broadest measure of economic activity, capturing the value of all goods and services produced within U.S. borders during a given time period. The economy has now been expanding, if slowly, since June 2009, when the Great Recession reached its official end, a panel of economists recently concluded.

As the economy gained momentum in late 2009 and early 2010, there was promise that a strong, self-sustaining recovery was kicking in. But as businesses completed a cycle of rebuilding their inventories and as government spending to stimulate the economy began tapering off in late spring, the growth rate started to slacken. That pattern continued through the summer.

The long-term economic growth rate is trending at about 2.5 percent - attributed to an increasing population and rising worker productivity. That means that growth at or below that level, such as experienced over the past six months, is not strong enough to pull the economy out of its deep rut. That stands in contrast to past deep recessions, such as in 1982, which were followed by several consecutive quarters of 5 percent or faster growth.

The unemployment rate was 9.6 percent in September, and few forecasters are expecting it to decline substantially in the months ahead. Many expect it to edge up, reflecting the tepid pace of growth. There is about a $900 billion gap between the amount of economic output the nation is capable of producing and actual output, and the third-quarter growth rate was strong enough to maintain that gap, but not fast enough to reduce it significantly.

The 2.6 rate of increase in personal spending, which accounts for about two-thirds of GDP, represented an acceleration from the 2.2 percent pace of growth in the second quarter. The strongest gains were in durable goods - long-lasting items such as automobiles and household appliances - for which consumption rose at a 6.1 percent annual rate.

Businesses, meanwhile, continued expanding, but at a more gradual pace than earlier in the year. Spending on equipment and software, which grew at a 20 percent or greater annual rate in the first half of the year, slowed to a 12 percent annual rate. Much of that earlier rebound appears, in hindsight, to have been the catch-up effect of companies replacing equipment that they had delayed replacing during the recession.

There was also a 9.7 percent rate of increase in investment in business structures, such as warehouses and office buildings. And businesses built up their inventories, contributing 1.4 percentage points to GDP.

The housing sector, which began shrinking in 2006, dragged down growth after a brief upturn in the second quarter. Residential investment fell at a 29.1 percent annual rate, although the housing industry has shrunk to such a small portion of the economy that it has little effect on the overall growth numbers, subtracting only 0.8 percentage points.

Trade, meanwhile, which hindered growth in the second quarter, continued to decline, subtracting 2 percentage points, as imports rose far more rapidly than exports.

Federal government spending rose at an 8.8 percent annual rate, but that was partly offset by an 0.2 percent pace of decline in state and local government spending.

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