Growth in U.S. exceeds forecasts on consumer spending

Economic growth in the U.S. was stronger than forecast in the third quarter, propelled by gains in consumer spending, defense outlays and homebuilding.

Gross domestic product, the value of all goods and services produced, rose at a 2% annual rate after climbing 1.3% in the prior quarter, Commerce Department figures showed today (Oct. 26) in Washington. The median forecast of 86 economists surveyed by Bloomberg called for a 1.8% gain.

“We are encouraged by the improvement we’re seeing in consumer spending and housing,” said Dean Maki, chief U.S. economist in New York for Barclays Plc, who correctly forecast the rate of growth. “These will be dominant themes in the fourth quarter too.”

Consumer confidence rose to a five-year high in October, another report today showed, suggesting that gains in spending can be sustained as the real-estate revival bolsters household finances.

The administration of President Barack Obama used the GDP report to promote measures it says would strengthen the economy, such as hiring more teachers, while challenger Mitt Romney seized on it as evidence Obama’s polices have failed.

The Thomson Reuters/University of Michigan final consumer sentiment index climbed to 82.6 this month, the highest since September 2007, from 78.3 in September. The median forecast of 60 economists surveyed by Bloomberg projected a reading of 83 compared with a preliminary figure of 83.1 issued earlier this month.

Forecasts for GDP ranged from 0.9% to 3.1%. The GDP estimate is the first of three for the quarter, with the other releases scheduled for November and December, when more information becomes available.

Consumer purchases, which make up about 70% of the world’s largest economy, grew at a 2% annual rate, up from a 1.5% second-quarter gain and compared with a 2.1% median forecast in the Bloomberg survey. Purchases added 1.4 percentage points to growth.

Lower gasoline prices and a drop in unemployment are helping to lift confidence.
The unemployment rate dropped to a three-year low of 7.8% in September from 8.1% in August. Payrolls rose 114,000 after climbing 142,000. Jobs data for October are due from the Labor Department on Nov. 2, four days before the election.

Retail sales in September and August had the best back-to-back showing since late 2010 as shoppers snapped up goods from cars to Apple Inc.’s iPhones. Target Corp., the second-biggest U.S. discounter, was among chains topping analysts’ estimates for same-store sales last month.

Cars and light trucks sold at a 14.9 million annual pace in September, the strongest since March 2008, according to Ward’s Automotive Group. Chrysler Group LLC and General Motors Co. reported gains.

Today’s report showed the saving rate fell to 3.7% from 4% as spending outstripped the gain in pay. Disposable income adjusted for inflation rose at a 0.8% annual rate from July through September, the least since the end of 2011, after a 3.1% gain in the second quarter.

Residential construction increased at a 14.4% rate, up from an 8.5% gain in the prior period. The pickup in homebuilding added 0.3 percentage point to third-quarter GDP, in line with the average contribution during the first half of 2012.

Spending by the federal government rebounded, led by a jump in defense outlays. It grew at a 9.6% rate, the most since the second quarter of 2010. Total public expenditures climbed at a 3.7% pace, the most in three years and restrained by a decrease at the state and local level.

Companies are bracing for the so-called fiscal cliff, the $607 billion in spending cuts and tax increases that are slated to take effect automatically next year unless Congress acts.

Corporate spending on equipment and software was unchanged, the weakest reading in three years, according to today’s report. Data yesterday showed orders for non-defense capital goods excluding aircraft, a proxy for future corporate spending on items like computers, engines and communications gear, stagnated in September and shipments fell.

“Executives don’t know what the future will hold, so they’re sitting on their hands,” said Scott Anderson, chief economist at Bank of the West in San Francisco, who correctly forecast third-quarter growth. “We’re seeing strength in areas that have been lagging, such as consumer spending and housing, while business investment is extremely weak.”

Companies are also cutting forecasts on slowing growth in Europe and Asia. The trade deficit expanded as exports dropped, subtracting 0.2 percentage point from third-quarter growth, today’s report showed.

The rate of economic growth would have been stronger if not for the drought that affected crops in the Midwest. A drop in farm inventories subtracted 0.4 percentage point from third- quarter GDP after cutting 0.2 point in the prior period, the report showed.