Breaking News: U.S. Economy Grew at 2% Annual Rate in 3rd Quarter

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Courtesy of The New York Times

Employees of General Dynamics in Lima, Ohio, work on an Abrams tank. Military spending rose 13 percent in the third quarter.

More optimistic consumers are propelling the economy forward, even as businesses pull back.

The pickup in spending by consumers, along with a burst of defense orders and a stronger housing market, helped the economy expand at an annual rate of 2 percent in the third quarter, a slightly better pace than had been anticipated, according to government data released Friday. In the previous quarter, economic growth had dipped to a rate of just 1.3 percent.

While growing more confident that the housing market has stabilized, households have been buoyed by lower energy prices, until recently a rising stock market and a slight improvement in employment. After years of shedding debt, there are also signs that consumers are starting to borrow again.

“Consumers are feeling wealthier so they are still out there spending,” said Joshua Dennerlein, an economist with Bank of America Merrill Lynch.

Still, the pace of economic activity is short of what’s needed to substantially reduce the unemployment rate, now at 7.8 percent and also well below the level of growth typical in this stage of a recovery after a sharp downturn.

What’s more, fears are growing that the economy could slow again in the fourth quarter. Companies are preparing for the possibility of steep tax increases and sharp spending cuts if Congress cannot agree on a deal to reduce the deficit after the election, a combination of factors frequently referred to as the fiscal cliff.

In fact, a series of disappointing earnings reports from the nation’s biggest companies this week, along with a handful of layoff announcements from corporate bellwethers, suggest businesses have already begun to retrench.

With the presidential campaign entering the final, desperate dash to Election Day, there was plenty of fodder in Friday’s report for both candidates to cite as they spar over the direction of the economy.

For President Obama, the best news was that consumer spending grew at an annual rate of 2 percent last quarter, up from 1.5 percent in the second quarter, while residential investment increased at an annual rate of 14.4 percent, compared with 8.5 percent in the second quarter.

The business snapshot was much dimmer. The report showed that business investment fell 1.3 percent, a reversal from the 3.6 percent increase recorded in the second quarter, and a sign businesses are indeed clamping down on spending ahead of the fiscal cliff.

Inventories also were a notable factor with the summer drought in the Midwest shaving overall growth 0.4 percentage point as farm inventories dropped.

In addition to the uncertainty about government policy, corporate performance has been hurt by a recession in parts of Europe and weaker demand from China. Some economists fear that all these factors will keep a lid on growth in the final quarter of 2012 and the first quarter of next year.

The Commerce Department data showed exports decreased by 1.6 percent in the latest quarter, compared with a 5.3 percent increase in the second quarter. It was the first time exports had fallen since the first quarter of 2009, when the global economy was reeling from the collapse of Lehman Brothers and the ensuing financial crisis in the United States.

At a campaign appearance in Iowa, Mitt Romney, the Republican presidential candidate, termed Friday’s report “discouraging,” adding, “slow economic growth means slow job growth and declining take-home pay.”

The new figure, released by the Commerce Department, is the government’s first estimate of growth in the third quarter. Slightly better than the 1.8 percent increase economists had been forecasting, it showed the nation rebounding to the growth it had in the first quarter of the year after a spring slump.

“The report highlights the fact that businesses have already begun to react to the looming fiscal cliff while consumers march steadily ahead,” said Mr. Dennerlein. Noting the jump in residential spending, he added that the slowly recovering housing sector is a bright spot.

Housing values and stock values certainly contribute to consumers’ sense of financial well-being. And despite the hesitancy among businesses, optimism among consumers continues to rise. A separate survey released Friday showed consumer sentiment at its highest level in more than five years, with the Thomson Reuters/University of Michigan index rising to 82.6 in October from 78.3 in September, though it was lower than a preliminary October reading of 83.1 that had been previously reported.

To be sure, the latest growth in consumer spending was still well below the rate of increase in the first half of the last decade, when easy credit and a boom in home prices fueled growth in the 3 percent range.

But it was a crucial antidote to gloom pervading the business sector, experts said. “We’d really be in trouble if consumer attitudes were deteriorating like business attitudes,” said Nigel Gault, chief United States economist for IHS Global Insight.

Mr. Gault warned, however, that the outlook among consumers could erode if political leaders in Washington cannot break the deadlock over tax and budget policy. “Consumers are not so forward-looking as businesses,” Mr. Gault said. “So there are two ways this can go. Either we clear up the uncertainty, or consumers start focusing on the fiscal cliff and we see consumer spending hurt as well.”

In recent days, government data and a steady drumbeat of disappointing earnings reports from corporate bellwethers have underscored the threat to the job market posed by softness in sectors more dependent on exports, like manufacturing and chemicals.

Dow Chemical and DuPont announced job cuts earlier in the week, and that list grew Friday with Newell Rubbermaid, which makes commercial and consumer products like Calphalon and Paper Mate pens, announcing plans to cut more than 1,900 workers, or just over 10 percent of its work force. And Rockwell Collins, an aviation and defense giant, said it was considering eliminating up to 1,250 positions, equivalent to roughly 6 percent of its employees.

The latest data suggest a tug-of-war between countervailing economic forces that could shift at any time. For example, growth last quarter was unexpectedly bolstered by a 13 percent jump in military spending that few economists expect to be repeated in the fourth quarter.

Without the increase from military spending, the economy would have grown at an annual rate of 1.4 percent, said Steve Blitz, chief economist at ITG Investment Research.

“Going forward, consumers might be able to continue at the current pace of spending but they’re not going to be able to drive the growth rate higher,” said Mr. Blitz. “And 2 percent isn’t enough to get unemployment dow

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