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GDP grows a modest 2% in 3rd quarter

Gross domestic product growth shows a small improvement from the second quarter's 1.7% rise. Stronger private spending and business investment help power the increase, and imports are blamed for keeping it down.

October 30, 2010|By Don Lee, Los Angeles Times

Reporting from Washington — The American economy is showing a little more pep in its step, the government reported Friday, but not enough to help bring down high unemployment or put the country on the road to sustained and widespread prosperity.

The nation's gross domestic product — the total value of goods and services produced inside U.S. borders — grew at a modest annual rate of 2% in the third quarter, up from 1.7% in the second quarter, the Commerce Department said.

Even though the United States is at least technically in the process of recovering from the worst recession in decades, the slow growth rate, high unemployment, the devastated housing market and widespread uncertainty over the future have seeded clouds of political resentment that shadow next Tuesday's congressional elections — especially for Democrats, who control both Congress and the White House.

"The most striking thing about today's report on gross domestic product is that it shows that the U.S. economy is still smaller today than it was when the recession began — even more than a year after the recession officially ended," said economist Josh Bivens of the Economic Policy Institute, a Washington think tank.

"This remains an historically slow recovery. Never since World War II has it taken so long to recover to pre-recession levels of GDP," he said.

Stronger private spending powered the latest gain, an encouraging sign as retailers head into a crucial holiday season. "Consumers look a little more willing to spend," said Shawn DuBravac, chief economist for the Consumer Electronics Assn. in Arlington, Va.

Business investment, too, was solid in the July-to-September period. Companies' spending on equipment and software again rose by double digits, although at a slower pace than in the second quarter, and investment in offices and other commercial buildings posted the first upturn after eight straight quarters of decline.

What's more, federal government expenditures continued to add juice to GDP growth.

So why wasn't U.S. economic output stronger than 2%?

In a word, imports.

Although American exports were up in the quarter, imports rose at an even faster clip. And the resulting trade deficit, in effect, amounted to a halving of the GDP growth rate in the third quarter.

"It does say that we continue to basically consume more than we produce," said economist Lynn Reaser, president of the National Assn. for Business Economics.

Exports are helping boost overall GDP, she said, and imports by themselves are not a bad thing, as their growth reflects stronger American demand. But, she added, "We've got to do something about the trade deficits."

Foreign trade and jobs have become a dominant campaign topic in the run-up to Tuesday's elections, and President Obama will depart next Friday for an Asia trip that includes the Group of 20 large economies' summit in Seoul and other meetings aimed at opening up foreign markets and boosting American sales overseas that would ultimately create more jobs at home.

Obama referred to the latest GDP report Friday during a visit to a metal shop in Beltsville, Maryland, where he spoke about the economy and boasted of cutting taxes 16 times for small businesses.

"Instead of providing tax breaks for companies that are shipping jobs overseas, we're giving tax breaks to encourage companies to invest right here in the United States of America — in small businesses, in clean energy firms, in manufacturers, in businesses like this one," he said at Stromberg Metal Works.

The president then renewed his push for a proposal for accelerated tax write-offs for business investments for equipment.

"The reason this company is able to compete against low-wage countries, against non-union workforces, is because it's got better equipment and it's got more skilled, better workers," he said.

Friday's economic report isn't likely to change companies' outlook for the economy or give them more reason to beef up hiring. The GDP data were in line with expectations, painting a picture of an economy that isn't facing as big a threat anymore of falling back into recession but that is nonetheless plodding along at an unsatisfactory speed.

"The pace of growth is still too weak to get a real recovery in the labor market … and that's the key ingredient to a sustained recovery that'll lead to more consumer spending and more support for the housing market," said David Regan, a senior investment specialist at JPMorgan Private Wealth Management in Los Angeles.

"We are seeing better spending data especially for higher income" households, he said. "What we'd like to see is that spreading" to other groups.

The latest GDP figures reinforced widely held expectations that the Federal Reserve on Wednesday will announce a new round of government bond purchases to drive down long-term interest rates and stimulate economic activity.

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