Consumers lifted U.S. economy last quarter
— -- Consumers opened their pocketbooks wider in the third quarter even as their confidence in a shaky recovery fell, a disparity that spelled good news for the economy.
The economy grew at a 2.5% annual rate in the third quarter, the Commerce Department said Thursday, a figure in line with analysts' estimates and helped drive a roaring stock market. Investors were particularly heartened by stronger-than-expected consumer spending and business investment.
Many experts say the economy's most robust quarterly performance in a year was fueled by temporary factors, and growth will likely dip in the next year. But the report palpably calmed fears that the U.S. could be slipping into another recession.
"You've got very broad-based growth," Wells Fargo chief economist John Silvia says.
Worries about another downturn had been rampant following the European debt crisis and Standard & Poor's downgrade of the USA's credit rating. Economists recently revised upward their third-quarter growth estimates in light of several positive economic reports. Still, the economy must grow by 3% or more to lower unemployment.
Consumer spending jumped 2.4%, up from 0.7% in the second quarter. That accounted for 1.7 percentage points of the total 2.5% expansion in the third quarter. The results exceeded estimates as Americans spent more on services such as health care, restaurants and finance.
"Because the strength was led by consumers, the economy's outlook" has improved, says economist Chris Rupkey of Bank of Tokyo-Mitsubishi. Consumer spending makes up about two-thirds of the economy.
The spending data seemed to defy low consumer confidence readings in the July, August and September monthly surveys by the Conference Board.
Mark Ehrlich, who coaches small businesses, bought a Jeep Cherokee, two suits and two printers in recent months. He says last summer's economic uncertainty created new business opportunities. "I choose to look on the bright side," says Ehrlich, 64, of Palm Desert, Calif.
Yet, chief U.S. economist Nigel Gault of IHS Global Insight noted Americans' real disposable income — after figuring inflation — fell 1.7%, the biggest drop in two years. That means consumers dipped into savings to finance their higher spending. The savings rate fell to 4.1% from 5.1%.
"That's not a solid foundation for growth," Gault says.
Economist Conrad DeQuadros of RDQ Economics says payroll growth of about 100,000 workers a month this year should accelerate to 150,000 in 2012, sustaining at least modest spending increases. Many economists expect inflation to ease as gasoline prices fall, leaving consumers more cash.
Meanwhile, business investment rose by 16.3%, the most in more than a year. Spending on equipment and software grew 17.4% as companies sought to raise productivity. Non-residential construction projects rose 13.3% as apartment and power plant building surged.
Some of the rise in business investment was due to the resolution of Japanese supply disruptions and falling oil prices, economists say, and growth will likely moderate. But James O'Sullivan, chief economist of MF Global, says cash-rich corporations are likely to continue to spend at a healthy pace.
The Commerce Department said total U.S. sales exceeded output. That means business inventories fell, reducing third-quarter economic growth by 1.1%. The depleted stockpiles likely will boost growth in the fourth quarter, economists say.
Trending Reader Picks
ABC News Live