U.S. Economy Grows Slightly More Than Expected

The U.S. economy grew at a better-than-expected 2.5% rate in the third quarter, the U.S. Commerce Department announced Tuesday, in its second estimate for the quarter. Higher exports, investment, and increased consumer spending quickened the pace of commercial activity in the world's largest economy.

In its initial estimate, the Commerce Department had put third quarter GDP growth at 2.0%.

A Bloomberg survey had expected third quarter GDP to increase 2.4%. The U.S. economy grew 1.7%, 3.7%, 5.0%, and 1.6% in the second and first quarters of 2010, and in the fourth and third quarters of 2009, respectively.

Prior to this, the U.S. economy was in recession, including contractions of minus 0.7% and minus 4.9% in the second and first quarters of 2009, and minus 6.8% and minus 4.0% in the fourth and third quarters of 2008.

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Investors should note that this is the second estimate of third-quarter GDP growth. The U.S. Commerce Department revises its GDP estimates as it receives more information on respective quarters not available earlier. The final estimate for third quarter growth will be released next month.

The Commerce Department said the acceleration in real GDP in the third quarter "primarily reflected a sharp deceleration in imports and accelerations in private inventory investment and in PCE that were partly offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports."

In current dollar terms (not adjusted for inflation), U.S. GDP rose 4.8% in the third quarter or by $171.5 billion to an annual rate of $14.75 trillion. In the second quarter, current-dollar GDP increased 3.7% or by $132.3 billion.

Exports, Fixed Investment Jump

In the third quarter, real nonresidential fixed investment jumped 10.3%, real exports increased 6.3%, consumer spending rose 2.8%, corporate profits increased 2.8%, and real final sales rose 1.2%.

Also, the change in private inventories added 1.3 percentage points to third quarter GDP, after adding 0.82 percentage points in the second quarter, the Commerce Department said.

Meanwhile, inflation remained tame, as the core personal consumption expenditure (PCE) price index, which excludes food and energy prices, rose just 0.8% in the third quarter, unchanged from the the initial estimate.

The GDP report came a day after economists surveyed by the National Association for Business Economics (NABE) forecast that the U.S. economy will grow 2.7% in 2010, followed by a 2.6% rate in 2011, as companies limit hiring and consumers maintain a cautious stance regarding spending.

The NABE predicted that the economy will add an average of 136,000 per month in 2011 -- or just slightly more than the 100,000 monthly new jobs required to keep the unemployment rate, currently 9.6%, from rising. The NABE sees the unemployment rate falling to just 9.2% by the end of 2011, but with inflation remaining low -- increasing 1.3% in 2011 after a 1.1% rise in 2010.

Is the Growth Fast Enough?

The estimated 2.5% third-quarter GDP growth rate will likely quell concerns that the world's largest economy is veering back into a ditch, in the form of a double-dip recession, but it's not nearly strong enough to cause the U.S. Federal Reserve to abandon the second phase of its quantitative easing program, or QE2, which the Fed started to implement earlier this month.

The Fed initiated the unconventional policy to both increase growth in an economy that's growing well below its potential, and to fend-off deflation, a protracted decline in prices that robs companies of revenue from sales.