LITTLE ROCK — The U.S. economy grew at an annual rate of 2.5 percent between July and September - nearly twice as much as in the second quarter - as Americans spent more money and companies stepped up capital investment, the Commerce Department said Thursday.
The best quarterly growth in a year came as a relief after anemic growth in the first half of 2011, an August of wild stock market shifts and the biggest drop in consumer confidence since the height of the recession.
But the growth was fueled by Americans who spent more while earning less and by businesses that invested in machines and computers, not workers.
“There is some gain in momentum after a very weak first half,” said Robert Dye, chief economist at Comerica Inc. in Dallas, who correctly forecast the gain in GDP. “We need to get the jobs machine going and get the housing market moving in the right direction. The economy remains in a low-to-moderate growth mode, and that keeps us vulnerable.”
Stocks surged as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. The Dow Jones industrial average rose 340 points, or 2.9 percent, to close at 12,209. The Dow hadn’t closed above 12,000 since Aug. 1.
The Obama administration welcomed the new data with subdued optimism.
“In spite of head winds hitting the U.S. economy, today’s GDP report - the ninth straight positive quarter - reflects strong consumer spending and export growth and continued investment by American businesses,” John Bryson, the recently confirmed commerce secretary, said in a statement.
The economy would have to grow at nearly double the third-quarter pace to make a dent in the unemployment rate, which has stayed near 9 percent since the recession officially ended more than two years ago.
For the more than 14 million Americans who are out of work and want a job, that’s discouraging news.
And for President Barack Obama and incumbent members of Congress, it means they’ll be facing voters with unemployment near 9 percent.
“It is still a very weak economy out there,” said David Wyss, former chief economist at Standard & Poor’s.
For now, the report on U.S. gross domestic product, or GDP, sketched a more optimistic picture for an economy that only two months ago seemed at risk of another recession.
The GDP report measures the country’s total output of goods and services. It covers everything from bicycles to battleships, as well as services such as haircuts and doctor’s visits.
Some economists doubt the economy can maintain its modest third-quarter pace.
U.S. lawmakers are debating deep cuts in federal spending next year that would drag on growth. And state and local governments have been cutting budgets for more than a year.
Wyss said that the collapse of housing had probably depressed annual growth by as much as 1.5 percentage points in the past two years.
Paul Ashworth, chief U.S. economist for Capital Economics, predicts that growth will cool in the fourth quarter and next year.
“While our baseline forecast does not include an outright contraction, we expect GDP growth to average a very lackluster 1.5 percent next year,” Ashworth said in a note to clients.
Other economists are a bit more optimistic. The breakthrough in Europe could help, as long as a final deal is implemented. At a minimum, that would remove what many economists had considered a major threat to the U.S. economy.
Few are changing their forecast on the basis of the deal because they had already assumed an agreement would be reached.
“The Europeans haven’t solved their long-term problems, but they did address the near-term issues, and that helps support the belief that we will be able to dodge a U.S. recession,” said Mark Zandi, chief economist at Moody’s Analytics.
Zandi forecasts growth of 1.9 percent for all of 2011 and 2.7 percent in 2012.
Consumers lowered the pace of saving as incomes declined, the Commerce Department report showed. The savings rate last quarter dropped to 4.1 percent, the lowest since the last three months of 2007. After-tax incomes adjusted for inflation decreased at a 1.7 percent annual rate, the biggest drop since the third quarter of 2009.
While the economic expansion is “encouraging,” faster growth is needed “to replace jobs lost in the recent downturn,” Katharine Abraham, a member of the White House Council of Economic Advisers, said in a blog.
The economy expanded at an average 0.9 percent rate in the first half of 2011, the worst performance since the recovery began in June 2009. Growth needs to exceed 2.5 percent to reduce the joblessness rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.
One bright spot is business investment. Corporate spending on equipment and software climbed at a 17.4 percent pace, the most in a year.It contributed 1.2 percentage points to growth.
“We are starting to see our customers resume their investment activity,” Richard Hill, chairman and chief executive officer at San Jose, Calif.-based Novellus Systems Inc., a maker of machinery used in semiconductor production, said on a conference call with analysts Wednesday.
A rush to qualify for a larger government credit may be contributing to the increase. The Obama administration’s tax compromise allows companies to depreciate 100 percent of investment in capital outlays in 2011 and 50 percent in 2012.
“A lot of the strength is being driven by tax incentives,” said Aneta Markowska, a senior U.S. economist at Societe Generale in New York.
Information for this article was contributed by Alex Kowalski, Bob Willis, Shobhana Chandra, Timothy R. Homan and Chris Middleton of Bloomberg News, Martin Crutsinger of The Associated Press and Kevin G. Hall of McClatchy Newspapers.
Front Section, Pages 1 on 10/28/2011