Business News : Consumers, businesses pump up Q3 growth

WASHINGTON (Business News) - The economy grew at its fastest pace in a year in the third quarter as consumers and businesses stepped up spending, creating momentum that could carry into the final three months of the year.

Though part of the increase in output came from the reversal of temporary factors that had restrained growth, the expansion was a welcome relief for an economy that looked on the brink of recession just weeks ago.

U.S. gross domestic product expanded at a 2.5 percent annual rate in the third quarter, the Commerce Department said in its first estimate on Thursday.

That was a jump from the 1.3 percent pace in the April-June quarter and matched economists' expectations.

"It is a relief, but there is still more work to be done to continue a sustainable recovery," said Sean Incremona an economist at 4CAST in New York.

U.S. Treasuries prices pared losses on the report, while the dollar fell against the euro and the yen.

U.S. stocks looked set for a 2 percent jump at the open on Thursday after European leaders agreed on a bailout fund for the region.

Consumers and businesses appeared to have set aside their fears about the recovery in the third quarter.

Consumer spending was the strongest since the fourth quarter of 2010, while business investment spending was the fastest in more than a year.

Even businesses had not anticipated the fairly strong demand and were slow to restock warehouses.

The peppier spending and a slower pace of inventory accumulation by businesses will lay a base for a solid fourth quarter, but a slowdown in Europe and the exhaustion of pent-up U.S. demand could leave a weak spot early in 2012.

And the recovery's pace is still too weak to lower a jobless rate that has been stuck above 9 percent for five straight months.

A separate report from the Labor Department showed new claims for state unemployment benefits fell 2,000 last week to a seasonally adjusted 402,000, pointing to a gradual improvement in the labor market.

FEARLESS SPENDING

A jump in gasoline prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan's earthquake had curbed auto production. Motor vehicle output has surged as those supply constraints have eased.

In addition, car sales, which were held back by the lack of popular models, have also shown renewed strength.

As a result, consumer spending, which accounts for about 70 percent of U.S. economic activity, grew at a 2.4 percent rate after slowing to a 0.7 percent pace in the second quarter.

The relative vigor comes even though c onsumer confidence has hit levels last seen during the worst of the 2007-09 recession.

Similarly, while some business surveys have pointed to a contraction in factory output, corporate America actually increased its investment spending during the quarter. Business spending rose at a 16.3 percent pace as companies splurged on equipment and software, and invested in nonresidential structures.

Inventories rose only $ 5.4 billion in the third quarter, the smallest gain since the fourth quarter of 2009, after increasing $ 39.1 billion in the second quarter.

Inventories subtracted 1.08 percentage points from GDP growth. Excluding the drag from inventories, the economy grew at a 3.6 percent pace -- pointing to underlying strength in domestic demand -- after expanding 1.6 percent in the April-June period.

The careful management of busi ness inventories bodes well for fourth-quarter production.

Apart from consumer and business spending, growth in the third quarter was also supported by a smaller U.S. trade deficit.

Spending on residential construction rose at a modest 2.4 percent pace after growing at a 4.2 percent rate in the second quarter. Government spending was flat, reflecting continued budget cuts by state and local governments. However, the pace of decline in state and local government spending is moderating.

The GDP report also showed a moderation in inflation pressures, with the personal consumption price index (PCE) rising at a 2.4 percent rate in the third quarter, slowing from the April-June quarter's 3.3 percent pace. Core PCE, which excludes food and energy, rose at a 2.1 percent rate after increasing 2.3 percent in the second quarter.