Economy picked up over summer

The U.S. economy grew at its fastest clip in a year during late summer as consumers and businesses shrugged off fears of a new recession, according to government data released Thursday that helped drive the stock market to its best day since August.

Investors were also cheered by overnight news that European leaders have reached an agreement on how to address their continent's debt crisis, and the Standard & Poor's 500 stock index ended the day up 3.4 percent. European markets were up even more sharply, with the German Dax index up 5.3 percent.

The agreement in Europe still has many details to be filled in, and the 2.5 percent pace of U.S. economic expansion in the third quarter isn't enough to bring unemployment down quickly even if it is sustained. But on both sides of the Atlantic, the news on Thursday offered a sense of relief: Maybe the world isn't falling apart, after all.

"The Europeans told us they're doing what they can do to take the immediate fear of financial collapse off the table, and the GDP numbers tell us that the U.S. economy did not collapse in the third quarter," said Jerry Webman, chief economist at OppenheimerFunds. "Together, they are a kind of sigh of relief."

Over the summer, uncertainty over Europe's future and a downgrade of U.S. debt helped drive a period of confidence-rattling volatility on global financial markets. But now that the broadest measure of economic activity for that period is in, it appears that U.S. consumers and businesses took the events in stride.

Gross domestic product rose at a 2.5 percent annual pace in the July-through-September quarter, the Commerce Department said, considerably better than the 1.3 percent gain in the second quarter and the 0.9 percent rate of growth for the first half of 2011.

If there is to be a dip back into recession, as some analysts have feared, it appears it did not start in the third quarter.

But GDP was not strong enough to represent a "catch-up" effect that could bring the unemployment rate down substantially over time. Rather, 2.5 percent is somewhere around the treading-water rate of U.S. economic growth - the approximate rate of economic expansion that would be expected, given an ever-increasing labor force and rising worker productivity, but not enough to put many of the 14 million unemployed Americans back to work.

In another sign that the economy is not falling into recession, the number of new people filing claims for unemployment insurance benefits edged down last week, to 402,000 from a revised 404,000 the previous week.

Growth was bolstered during the quarter by a rebound in some of the factors that had held the economy back in the first half of the year. Automobile-supply chains that had been disrupted by the Japanese earthquake in the spring reopened, and oil prices moderated after spiking early in the year.

The details of the new report on GDP, which aims to capture the value of goods and services produced within U.S. borders during the quarter, were generally more favorable than expected. Spending by American consumers rose at a 2.4 percent annual rate, better than analysts had forecast, suggesting that even as their confidence has been walloped, Americans continued going to stores.

But the ailing job market and stagnant incomes could weigh on consumer spending in the months ahead, and few analysts expect households to drive rapid growth any time soon.

"The acceleration in consumer spending was driven by a drop in the saving rate, not by stronger income growth," Nigel Gault, chief U.S. economist at IHS Global Insight, said in a report.

Business investment was a source of particular strength in the third quarter, as it has been for most of the past two years. Spending on equipment and software rose at a rate of 17.4 percent, and spending on structures such as office buildings and factories rose at rate of 13.3 percent.

A major question for the future will be whether the onset of a new wave of volatility and uncertainty in financial markets worldwide leads businesses to become more cautious in their capital-spending plans in the final months of the year. At least through late summer, they were in expansion mode.

In Europe, leaders announced a 50 percent reduction in Greece's loan repayments to private lenders, a $1.4 trillion rescue fund to keep credit flowing to other troubled nations and a bank-recapitalization program designed to boost reserves by the middle of next year.

But behind the rhetoric, many details remain to be worked out. Banks must agree to the latest bailout for Greece, which still would leave its gross debt at 120 percent of its economy by 2020, down from 160 percent. The rescue-fund firewall relies on leveraging the European Financial Stability Facility rather than new government contributions. And European banks still could remain short of capital for the next eight months, threatening the flow of credit to consumers.

The effects of Europe's ills have damaged U.S. interests, from multinational companies to major exporters. Individual investors have plenty of reason for concern, as the enthusiasm from earlier agreements has given way to pessimism and stock-market dives.

by Neil Irwin Washington Post Oct. 28, 2011 12:00 AM



Economy picked up over summer