U.S. Economy Grows 2 Percent in Q3 on Housing Recovery

Andrew Klips |

The U.S. economy picked-up some steam in the third quarter with gross domestic product (GDP) – the broadest measure of a country’s health – increasing by 2 percent from July to September after 1.3 percent growth in the second quarter, according to the Commerce Department. Economists were expected growth of 1.7 percent. GDP is the sum of all the goods and services produced in a country.

The beat of expectations is positive, but the 2 percent growth is still well below the 3 percent growth rate that economists consider healthy and necessary to reduce the 7.8 percent unemployment rate. In the first quarter of 2012, GDP also showed 2 percent growth.

The growth was fueled in part by acceleration in construction on homes and increased government and consumer spending. Consumer spending, which accounts for up about 70 percent our country’s economic activity, rose 2 percent during the latest quarter after a 1.5 percent increase in Q2. The problem is that disposable income, the amount of money a person has after taxes, only increased by 0.8 percent in the third quarter, meaning that consumers had to take the money out of savings in order to boost spending. This is evidenced by the savings rate for the quarter to fading by 0.3 percent to 3.7 percent from the second to the third quarter.

The housing industry stayed its course to recovery with a 14.4 percent increase in spending in Q3. At its current pace, 2012 housing investments will contribute positively to GDP for the first time in six years.

Government spending rose 3.7 percent in the third quarter, largely on the back of increase defense spending, which had fallen in the second quarter.

Growth was tempered by a 1.6 percent drop in exports and a 1.3 percent decline in investments of business equipment and software after a modest 0.4 percent growth in Q2. Imports also fell by 0.2 percent.

Inflation in third-quarter GDP rose at surprising 1.8 percent annual rate from 0.7 percent in the second quarter, mainly attributable to higher gas prices. So-called core inflation, which strips out volatile energy and food prices, came-in at 1.3 percent.

The two-percent expansion in the U.S. economy will surely be a talking point of President Barack Obama with the election only 11 days away. On the other side of Washington, Republican presidential candidate Mitt Romney is surely going to emphasize that the GDP growth rate is to slow and actually down from last year’s paltry 1.8 percent growth. Also looming in the balance is the still unaddressed fiscal cliff that could dampen sentiment and slow growth for the fourth quarter.

The deceleration in business investment doesn’t bode well for the fourth quarter. Many economists think growth will taper off unless Washington acts quickly to avert the onset of higher taxes and deep spending cuts slated to kick in on Jan. 1, a scenario known as the “fiscal cliff.”

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