U.S. Economy Stronger in Third Quarter

The Wall Street Journal

27 October 2011

The economy grew 2.5% in the third quarter, a quick-enough pace to blunt fears that the U.S. is about to plunge into recession again but not fast enough to signal that the halting recovery is about to get on a roll.

The rise in gross domestic product—the sum of all goods and services produced—suggests the U.S. found its footing after events earlier this year, including a surge in gasoline prices and waves of stock-market turmoil, led wary consumers and businesses to pull back on spending. But the 2.5% pace of growth—nearly twice that of the second quarter—is too slow to create enough jobs to bring down the nation’s high unemployment rate anytime soon.

Thursday’s report from the Commerce Department, along with news of an agreement to tackle Europe’s debt woes, cheered markets and reaffirmed most economists’ conviction that the U.S. isn’t sinking back into recession. A spurt of spending by businesses on equipment and software, which surged 17.4% in the period, signaled companies aren’t paralyzed by uncertainty. Spending by consumers also climbed, suggesting worries about the job market didn’t stop them from shopping.

“The economy just turned out to be more resilient to the negative shocks than many of us feared,” said Justin Wolfers, an economist at the University of Pennsylvania’s Wharton School who not long ago said a recession was “on the table.” He now says an economic contraction in 2011 is highly unlikely, but like other economists, he cautioned against too much optimism. Growth would have to be above 3% to substantially cut into the nation’s 9.1% unemployment rate, economists say.

“If the economy grew at this rate forever, the unemployment rate wouldn’t fall. We’d be stuck where we are,” Mr. Wolfers said.

Economists pointed out another troubling trend in Thursday’s report: Consumers are spending more even as their wages stagnate and they save less, a trend that economists say is unsustainable and makes Americans vulnerable to crises.

Consumer spending rose 2.4% in the third quarter, after rising 0.7% in the earlier quarter. If consumers cut back on spending—which constitutes about 70% of economic activity—it would hurt growth.

Amid an uneven recovery, companies have been more willing to spend on equipment than on people. Nonresidential fixed investment, a measure of business spending, rose 16.3% last quarter after rising 10.3% in the second quarter. In another positive sign for U.S. businesses, exports rose 4%.

Atlas Machine & Supply Inc. has seen a 15% increase in total sales this year, said Rich Gimmel, president of the Louisville, Ky., equipment maker. But sales are coming from businesses that want to replace old equipment rather than expand. “Nobody is doing this like they did in the early ’80s where you had this groundswell of optimism” about the recovery, Mr. Gimmel said. “It’s more of a begrudging, ‘Demand may come back but I’m not sure how sustainable it’s going to be, so I’m going to spend just enough to keep up.’ ”

The lack of expansion has left many Americans out of work or in part-time jobs. Betsy Armacost hasn’t had full-time work since November 2007, when she lost her job at a casino and hotel in Atlantic City, N.J. Ms. Armacost, 56 years old, has made do with temporary jobs, most recently as a part-time telemarketer.

At the casino, Ms. Armacost earned about $600 a week and received health benefits. Since losing her job, she moved from her rented Atlantic City condo to Myrtle Beach, S.C. In a good week, she brings home about $230 from her telemarketing work. She spends nearly every dollar she brings home: $170 a week pays for her new home, a motel room. She fears what will happen if she loses her job or can’t find full-time work.

The labor market has been improving slowly, and the number of Americans filing new claims for jobless benefits fell again last week by 2,000 to 402,000, the Labor Department said in a report Thursday.

But budget cuts by state and local governments signal more gloom for employment as well as economic growth. State and local governments subtracted 0.16 of a percentage point from growth last quarter. The government of Maryland’s Baltimore County is offering employees early retirement packages in a bid to trim 200 jobs. The move is designed to save at least $15 million a year out of a roughly $1.6 billion operating budget, a county spokesman said. The county’s tax revenue is declining, and it also is dealing with substantial cuts in state and federal aid.

Economic uncertainty and a dreary job market have been a drag on housing, which showed little improvement last quarter, according to the GDP report.