GDP Grew 2.5 Percent in Third Quarter, With Boost From Consumers

Stocks close higher and recession fears ease with new economic growth report.

ByABC News
October 27, 2011, 8:33 AM

Oct. 27, 2011 — -- Stocks closed higher on Thursday after European leaders agreed on a plan to avert a Greek default and the Commerce Department announced third-quarter gross domestic product grew 2.5 percent, boosted by higher consumer spending, allaying fears that the economy is slipping into another recession.

The Dow Jones industrial average increased about 2.9 percent to 12,209 and the tech-heavy Nasdaq increased about 3.3 percent to 2,784 at the end of the day. The S&P 500 had its biggest monthly rally since 1974, according to Bloomberg, increasing 3.4 percent to 1,285.

The GDP rate was in line with what economists were expecting. The 2.5 percent growth rate is almost triple the 0.9 percent pace of economic growth in the first half of this year, which has been far too slow to generate any job growth. Unemployment has remained stubbornly high at over 9 percent.

"Clearly today's GDP report is indicative of an economy that is extractating itself from a temporary soft patch, and not one that is rolling into another recession," Phil Orlando, chief equity strategist with Federated Investors, said.

The revised second-quarter GDP increased at an annual rate of 1.3 percent, the Commerce Department announced at the end of September. In the first quarter, real GDP increased 0.4 percent.

According to National Bureau of Economics Research, the recent recession began in December 2007 and ended in June 2009. While many had feared a "double-dip" recession, in September 2010 the group announced that "any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date."

The strongest element of Thursday's GDP report was personal consumption.

Real personal consumption expenditures -- household spending -- increased by a more-than-expected 2.4 percent in the third quarter, compared with an increase of 0.7 percent in the previous quarter.

"That's a trend we think has legs into Christmas given the strength of the back-to-school season in August and September," Orlando said.

Orlando added that the GDP figure has the potential to be revised higher for its first revision in one month, when all data from September is included.

John Bowler, director of country risk service with the Economist Intelligence Unit, said purchasing managers' indices for the manufacturing and services sectors had suggested an improvement in September's activity, and private consumption and industrial production have been rising. Among the releases before Thursday's report were income growth and retail sales, which increased 1.1 percent in September to $395.5 billion, the biggest gain in seven months thanks in large part to auto sales, the Commerce Department reported earlier this month.

Bowler said on balance the data suggest some improvement in economic conditions, which can largely be traced to a fall in oil prices in recent months, the resolution of supply chain bottlenecks stemming from the natural disasters in Japan, and an end to the uncertainty created by the debt ceiling debate in Congress in early August.

The Labor Department also announced on Thursday that initial jobless claims declined 2,000 to 402,000. Last week, the Labor Department announced in the week ending October 15, seasonally adjusted unemployment initial claims were 403,000, a decrease of 6,000 from the previous week's revised figure of 409,000.

Employers created a total of 103,000 jobs in September, which Bowler called "a mildly encouraging sign." But he said at least 150,000 jobs will need to be created each month if the unemployment rate is to start falling.

Bowler said he sees little reduction in the jobless rate over the next 18 months.

"But firms are sitting on record levels of cash and are generating strong profits. If they wish to expand, the funds are available," he wrote in a note. "Businesses have probably also exhausted the extra productivity they can squeeze out of their existing workforces."

The private sector added almost 250,000 jobs a month from February to April. But private-sector job growth slowed to just 72,000 a month in May to September, including job losses in the public sector.