U.S. Economy Grew at a 2% Rate in the Third Quarter

From The New York Time         By MICHAEL POWELL

Published: October 29, 2010

      The United States economy grew at an annual rate of 2 percent in the third quarter, the Commerce Department reported Friday, as it struggles to gain any momentum for a sustained recovery.     

     That estimate matched the consensus forecasts for the gross domestic product, and is a slight uptick from the second quarter.
     An economy growing at a sluggish, 2 percent, nearly all economists agree, cannot produce nearly the demand needed to bring down the nation’s painfully high 9.6 percent unemployment rate. And the trade gap remains wide, as imports outpaced exports.    
     These numbers are unlikely to provide much of a morale boost for President Obama and Democrats, who are just days away from crucial midterm elections. High unemployment and soaring foreclosure numbers in the Midwest and Western states already made this a particularly tough election season for Democrats. Friday’s numbers will probably produce little relief.
     “It’s the expected G.D.P. number, which is mostly bad news for the economy,” said Josh Bivens, an economist with the liberal leaning Economic Policy Institute. “The growth rate is just nowhere near enough to put downward pressure on unemployment.”
     Demand, seen as crucial to re-igniting the American economy, appeared flaccid in the third quarter, although there were, here and there, hints of increased consumer spending. Income growth adjusted for inflation and taxes slowed noticeably, rising 0.5 percent in the July-September period after increasing 4.4 percent in the second quarter. And at the other end, prices excluding food and energy increased 0.6 percent, compared with 0.8 percent in the second quarter.
     In recent weeks, the economy has presented two faces, which is reflected in the latest G.D.P. numbers. There have been fledgling signs of growth: home sales and chain store sales are up bit, a swelling stock market has raised consumer confidence a few notches, and jobless claims fell noticeably last week, albeit to a still high and painful level.
     At the same time, the steroidal effect of the stimulus spending is fading. City and state governments have shed tens of thousands of employees, and states face a sea of red ink as they look at next year’s budgets.
“Two percent growth is not great but it beats zero,” said Steve Blitz, chief economist with ITG investment research. “The consumer is still underemployed and over indebted, so the normal push won’t be there. But you’re at least seeing enough spending and growth by the consumer to keep the economy going at 2 percent or more.”
    Friday’s number is a Commerce Department estimate based on a reading of many sectors of the economy, and that the final number may be revised substantially higher or lower. In the second quarter, the surprise was to the downside: the initial G.D.P. report had placed the growth rate at 2.4 percent, and it subsequently wheeled down to an annual rate of 1.7 percent.
    The midterm elections on Tuesday further complicate the picture. As certainty edges aside uncertainty after votes are counted, American business might start spending a bit more, and banks might start lending. But few are willing to turn that wish into a forecast.
    Consumer spending, which accounts for 70 percent of the economic growth in the United States, remains the great unknown. Americans have shed some debt, which is good, but largely in an unsightly fashion, which is not so good. They have defaulted in record numbers on credit card debt and lost their homes to foreclosure. The Federal Reserve Bank of San Francisco issued a notably gloomy forecast recently. “The economic recovery is proceeding at a very slow pace and has lost momentum since the spring,” the bank noted. “No sector of the private economy stands ready to drive a robust recovery.”
    And David Rosenberg, economist for the Canadian investment firm Gluskin Sheff and Associates, does not put a lot of faith in consumers pulling the economy out of its ditch. “Make no mistake,” he said, “the primary trend remains on a downward slope as it pertains to discretionary spending.”
   Personal savings was estimated at 5.5 percent, compared with 5.9 percent in the second quarter.
The European economies have shown signs of stabilizing of late, with Germany as a potential driver of growth (its unemployment recently reached an 18-year low). And this could bode well for America’s export sector. But imports in the third quarter once again grew faster than exports Imports grew at an annual rate of 17.4 percent, compared with an 5 percent for exports.
    Government spending has slowed as the effects of the stimulus spending begin to wear off. That was reflected in the unemployment numbers for September. Companies added just 64,000 jobs last month, but over all, the economy lost 95,000 nonfarm jobs in September, the result of a 159,000 decline in government jobs. Local governments were particularly hard hit.
    “The problematic factor is that consumers remain fundamentally insolvent or worried about becoming so, and too many of the major banks are zombies uninterested in commercial or industrial lending,” said James K. Galbraith, an economics professor at the University of Texas.
    Still, each quarter that the economy does not lapse back into recession adds incrementally to consumer and business confidence, and perhaps eventually to growth. The great immediate test, economists say, is the fourth quarter of 2010. The hope, no more than that at this point, is that small signs of market strength might coalesce into something that looks like actual recovery.
    “As with money, there is a power of compounding the economy,” Mr. Blitz said. “The longer you go with 2 percent growth, you begin to push up against constraints, and the more the fear of unemployment ebbs, the more chance there is that people will begin to feel confident. It’s a very slow burn.”