Third-Quarter GDP Rose to 2% on Consumer Spending

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consumer spending boosts third-quarter GDPThe U.S. economy registered a growth rate of 2% in the third quarter, as consumer spending increased at its best pace in about four years -- providing some hope that it's capable of helping maintain the expansion. The report was in line with economists' expectations.

Consumer spending increased at a 2.6% annual pace in the quarter -- its fastest pace since the fourth quarter of 2006, and up from 2.2% in the second quarter.

A Bloomberg survey had forecast third-quarter GDP to increase 2%, after posting increases of 1.7%, 2.7% and 5.6% in the second and first quarters of 2010, and fourth quarter of 2009, respectively. Investors should note that this is the first estimate of third quarter GDP growth. The U.S. Commerce Department revises its GDP estimates as it receives more information not available earlier.

Trade Subtracted From Overall Growth

The Commerce Department report attributed the slight increase in third-quarter GDP "personal consumption expenditures, private inventory investment, nonresidential fixed investment," and federal government spending. With imports growing faster (17.4%) than exports (5%), trade subtracted from GDP growth.

If the trade picture improves via increased exports and/or deceased imports, U.S. GDP growth would increase, all other factors being equal. Moreover, given the dollar's decline in the second half of 2010, exports may indeed fare better heading into 2011.

In current-dollar terms (not adjusted for inflation), U.S. GDP rose 4.2% in the third quarter, or $151.5 billion, to an annual rate of $14.73 trillion. In the second quarter, current-dollar GDP increased 3.7%, or $132.3 billion.

In addition to the third quarter's 2.6% consumer spending rise, outlays for durable goods jumped at an 6.1% annual rate, nondurable goods increased 1.3% and services climbed 2.5%. Also, business investment increased 9.7%, but that's down substantially from a 17.2% increase in the second quarter. Government spending rose 3.4%.

Also in third quarter, the U.S. savings rate slipped to 5.5% from 5.9% in the second quarter.

Setting the Stage for "QE2"

The preliminary third quarter report shows a U.S. economy that's gained some steam but still operating well below potential -- which economists call a substantial "output gap." The U.S. isn't growing strong enough to lower the high 9.6% unemployment rate. That would require a better-than-2.5% growth rate.

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This is why the Federal Reserve is likely to move forward with a second phase of its quantitative easing program, or QE2, to stimulate the economy. The Fed Open Market Committee meets Nov. 2 and 3 to evaluate monetary policy, including the quantitative easing and short-term interest rates.

The economy's underperformance will also likely affect Tuesday's election and the balance of power in Washington. In a Gallup Poll conducted Oct. 21-24, 43% of adults surveyed listed the economy as their most important issue, 23% cited health care and 18% cited the size of the federal government.

Historically, when the economy is in poor shape and unemployment is high, voters hold the party in power responsible. That theory is likely to hold once again in 2010. The Democrats are projected to lose 40 to 50 seats in the House and six to eight in Senate, the former shifting control of the House to Republicans.
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