Feds: Economy grew modestly in third quarter

The economy grew at a moderate pace last summer, reflecting stronger spending by businesses to replenish stockpiles. More recent barometers suggest the economy is gaining momentum in the final months of the year.

Gross domestic product increased at a 2.6 percent annual rate in the July-September quarter, the Commerce Department reported Wednesday. That's up from the 2.5 percent pace estimated a month ago. While businesses spent more to build inventories, consumers ended up spending a bit less.

Many analysts, however, predict the economy strengthened in the October-December quarter. They think the economy is growing at a 3.5 percent pace or better mainly because consumers are spending more freely again.

Even if analysts are right, the economy still won't be growing quickly enough to make a noticeable dent in unemployment.

By some estimates, the economy would need to grow by 5 percent for a full year to push down the unemployment rate by a full percentage point. But for all of this year, the economy is expected to expand by only 2.8 percent.

Still, the third-quarter's performance marks an improvement from the feeble 1.7 percent growth logged in the April-June quarter. The economy's growth slowed sharply then. Fears about the European debt crisis roiled Wall Street and prompted businesses to limit their spending.

In the third quarter, greater spending by businesses on replenishing their stocks was the main factor behind the slight upward revision to GDP. That spending added 1.61 percentage points to growth, compared with 1.30 percentage points previously estimated.

Consumers boosted their spending at a 2.4 percent pace. That was down from a 2.8 percent growth rate previously estimated. Even so, consumers increased their spending at the fastest pace in four years. The slight downward revision reflected less spending on health care and financial services than previously estimated.

More recent reports from retailers, however, show that shoppers are spending at a greater rate in the final months of the year.

Companies are discounting merchandise to lure shoppers. A price gauge tied to the GDP report showed that prices — excluding food and energy — rose at a 0.5 percent pace in the third quarter, the slowest quarterly pace on records going back to 1959.

Americans have more reasons to be confident. Stock prices are rising, helping Americans regain vast losses in wealth suffered during the recession. Job insecurity remains a problem, but the hiring market is slowly improving. And loans aren't as difficult to obtain for those with solid credit histories.

Even with the improvements, though, consumers are showing some restraint. In the past, lavish spending by consumers propelled the economy to grow at a rapid pace. After the 1981-1982 recession, the economy expanded at a 9.3 percent clip. Consumers increased their spending at an 8.2 percent pace.

Consumers have yet to display that level of confidence in the economy. While hiring is improving, employers still aren't adding enough jobs to lower the unemployment rate. Unemployment rose to 9.8 percent in November and has exceeded 9 percent for a record 19 straight months.

A tax-cut package signed into law by President Barack Obama last week should help bolster the economy next year. Some predict growth for all 2011 will be around 4 percent.

A reduction in the Social Security payroll tax will provide workers with more take-home pay. That should boost spending and help the economy grow. Even with stronger economic growth anticipated for next year, analysts predict it will still take until near the end of this decade to drop unemployment back down to a more normal 5.5 percent to 6 percent level.

The government's estimate of GDP in the July-September quarter was its third and final one. The government makes a total of three estimates for any given quarter. Each new reading is based on more complete information. GDP measures the value of all goods and services — from machinery to manicures — produced within the United States.