American economy expands at modest 2 pct pace

[October 27, 2012]  WASHINGTON (AP) -- The latest snapshot of economic growth shows the U.S. recovery remains tepid.

Growth in the July-September quarter climbed slightly but was still too weak to stir significantly more hiring. The pace of expansion rose to a 2 percent annual rate from 1.3 percent in the April-June quarter, led by more consumer and government spending.

Voters who are still undecided about the presidential election aren't likely to be swayed by Friday's mixed report from the Commerce Department.

"For the average American, I don't think changes in quarterly GDP" make a big difference in their perception of the economy, said Andrew Kohut, president of the Pew Research Center. "It's certainly good for the president that the number is not bad because that would resonate."

With 11 days until the election, the economy is being kept afloat by a revitalized consumer and the early stages of a housing recovery. But more than three years after the Great Recession ended, the nation continues to struggle because businesses are reluctant to invest, and slower global growth has cut demand for American exports.

Republican nominee Mitt Romney is telling voters that President Barack Obama's policies have kept the economy from accelerating and have even slowed growth in the past two years. The 1.7 percent annual growth rate for the first nine months of 2012 remains slightly behind last year's 1.8 percent growth. And both are below 2010's growth of 2.4 percent.

The economy contracted at a 5.3 percent annual rate in the first three months of 2009, just as Obama took office during the worst downturn since the Great Depression. Obama says his policies stabilized the economy later that year and argues that the stimulus package and auto bailout helped it grow in 2010.

The White House points to an economy that's expanded for 13 straight quarters. Yet this year's third-quarter growth is slightly below the 2.2 percent average pace since the recession ended in June 2009.

The economy's health is most closely tied to consumers, whose spending drives 70 percent of economic activity.

The latest report showed some progress.

Consumer spending rose at an annual rate of 2 percent in the July-September quarter, up from 1.5 percent in the previous quarter. And a survey by the University of Michigan released Friday found consumer confidence increased to its highest level in five years this month. That suggests spending may keep growing.

Americans spent more on cars, adding nearly 0.2 percentage point to growth. Housing added to growth for the sixth straight quarter.

"Those are the sectors that reflect growing consumer confidence and greater lending," said Joseph Carson, U.S. economist for AllianceBernstein, an asset management firm.

Still, more jobs and better pay are needed to sustain that growth, he added. After-tax, inflation-adjusted income rose at only a 0.8 percent annual rate in the third quarter. That was down from a 3.1 percent rate in the previous quarter.

Income includes not only wages but also dividends, rental income and government or workplace benefits, among other items.

With businesses nervous about the economic outlook, hiring isn't likely to pick up soon.

Many companies worry that their overseas sales could decline further if recession spreads throughout Europe and growth slows further in China, India and other developing countries. Businesses also fear the tax increases and government spending cuts that will kick in next year if Congress doesn't reach a budget deal.

That's caused them to invest less in new buildings and equipment. Business spending on equipment and software was flat in the July-September quarter, the first quarter it didn't increase since the recession.

"Uncertainty at home and abroad is holding back the business sector," Nigel Gault, an economist at IHS Global Insight, said in an email. "How quickly those uncertainties clear up ... will determine how quickly the overall growth rate can pick up."

One big driver of growth was a sharp increase in defense spending, which rose by the most in more than three years. That was likely a one-time boost.

Growth was held back by the first drop in exports in more than three years. It was also slowed by the effects of the drought that struck the Midwest last summer. The drought cut agriculture stockpiles and reduced the economy's annual growth rate by nearly a half-point.

In a healthy economy, growth between 2.5 percent and 3 percent is usually sufficient to keep the unemployment rate low. But the unemployment rate is 7.8 percent. Growth needs to top 3 percent to generate enough hiring to lower the rate steadily.

The government's report covers gross domestic product, which measures the nation's total output of goods and services -- from restaurant meals and haircuts to airplanes, appliances and highways. Friday's was the first of three estimates of third-quarter GDP.

Analysts were doubtful that the report would sway many undecided voters in battleground states.

Since the recovery began more than three years ago, the U.S. economy has grown at the slowest rate of any recovery in the post-World War II period. And economists think growth will remain sluggish at least through the first half of 2013.

Some analysts believe the economy will start to pick up in the second half of next year.

By then, economists hope the tax and spending confrontations that have brought gridlock to Washington will be resolved. That could encourage businesses to invest and hire.

The Federal Reserve's continued efforts to boost the economy by lowering long-term interest rates may also help by generating more borrowing and spending by consumers and businesses.

But the economy is still being slowed by consumers' efforts to spend less, increase their savings and pay off debts, economists say. And banks remain cautious about lending in the aftermath of the financial crisis. That's why recoveries after financial crises are usually weak.

"There's just a reality here," said Paul Edelstein, an economist at IHS Global Insight. "You don't recover from these types of events as quickly as you'd like."

[Associated Press; By CHRISTOPHER S. RUGABER]

AP Economics Writers Paul Wiseman and Martin Crutsinger contributed to this report.

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