Economy still sluggish as nation prepares to vote

[October 30, 2010]  WASHINGTON (AP) -- The last read on the economy before the midterm elections found Americans are spending a little more but not nearly enough to bring down high unemployment -- one final bit of bad news for Democrats.

The economy expanded at a 2 percent pace from July to September, the Commerce Department said Friday. It marked a slight improvement from the scant 1.7 percent growth rate in the previous quarter.

But to keep up with population growth and actually bring down unemployment, the economy must grow much faster. Economists figure it takes growth at a rate of about 5 percent for a full year to lower the jobless rate by a percentage point.

Democrats risk losing control of the House and perhaps the Senate on Tuesday at a time when nearly 15 million Americans are out of work and the jobless rate is 9.6 percent.

"The eggheads say the recession is over. But it still feels like one out there," noted Ken Goldstein, an economist at the Conference Board, a research group that monitors consumer behavior. Economists declared that the recession technically ended in June 2009.

"It is not just anger at the politicians," he added. "When voters come out of the voting booth and go to work they will still be angry. They are angry that we're not even close to being out of this."

The economy is the top issue for voters. More than 70 percent say it's in poor condition, according to the most recent Associated Press-GfK Poll, conducted earlier this month.

Nearly three in five disapprove of how President Barack Obama has handled the economy, and voters trust Republicans more than Democrats on the issue by a 10-point margin, the poll found.

Obama acknowledged after the new economic figures were released that the country needs faster growth.

"Political season's going to be over soon," the president said. "And when it does, all of us are going to have a responsibility -- Democrats and Republicans -- to work together wherever we can to promote jobs and growth."

Americans did increase their spending, at a clip of 2.6 percent. That was the biggest quarterly gain since the end of 2006, before the recession began. A rebound in the stock market and bargains on everything from cars to furniture apparently enticed them to shop.

A year after the severe recession of 1981 and 1982 ended, Americans were spending at a much faster pace of 6.5 percent. And the economy was growing more than four times as fast as it is now.

This time, there is little sign that people will feel confident enough in the economy and their own financial well-being anytime soon to spend at the levels that would create enough jobs to really help.

Unemployment isn't the only challenge. Americans' wages and benefits are nearly flat, rising only 0.4 percent for the quarter. No one expects that to improve anytime soon, either. With few jobs available, workers have little bargaining power.

Businesses are reluctant to spend more, too. Corporations are sitting on huge piles of cash -- about $1.8 trillion -- because they're not comfortable hiring freely and making major investments.

On top of that, they are facing uncertainty about how the tax code might change depending on who controls the next Congress, some analysts note.

Companies spent on equipment and software at only half the pace of the prior quarter. They increased spending on commercial construction projects, such as office buildings and factories, for the first time in more than two years.

Businesses did spend more to replenish their stockpiles, but economists say they won't need to do that as much in the coming months, reducing the benefit to the economy.

The same goes for government spending. Even though the federal government contributed to growth in the third quarter, stimulus money is drying up at a time when state and local governments are cutting spending.

Another problem is that much of the money spent by businesses and consumers is leaving the country. While Americans had less of an appetite for imports this summer than earlier in the year, imports still outpaced exports, widening the trade gap.

To strengthen the economy, the Federal Reserve is all but certain to take new action next week and start buying government bonds again. The idea is to make loans cheaper and spur people to spend more, increasing economic growth.

But even if the Fed's plan works, economists say it is likely to provide modest help, perhaps a couple of tenths of a percentage point in the fourth quarter. Unemployment is still expected to be above 9 percent by the end of this year.

"The poor job picture is the Achilles' heel of the economy," said economist Sung Won Sohn of California State University.

[Associated Press; By JEANNINE AVERSA]

Alan Fram contributed to this report.

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