Consumer Spending Pumped Up Economy in Third Quarter

The U.S. economy grew at its fastest pace in a year in the third quarter as consumers and businesses alike stepped up spending, creating momentum that could carry them through the holiday shopping season.

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The nation’s gross domestic product grew at a 2.5% annual rate in the third quarter, according to a Commerce Department report issued Thursday, nearly double the 1.3% pace in the April-June quarter.

“The probability of a double-dip [recession] has diminished quite a bit,” said Sung Won Sohn, an economics professor at California State University in the Channel Islands, ahead of the report.

Consumer spending last quarter was its strongest since the fourth quarter of 2010, while business investment spending was its fastest in over a year. Furthermore, despite strong consumer spending, businesses were slow to stock up their warehouses. These two factors have the economy set for a solid fourth quarter, but a slowdown in Europe and the exhaustion of pent-up U.S. demand, which has been driving sales, could see growth decelerating in early 2012.

Rising gasoline prices were weighing on consumer spending earlier in the year, and supply chain disruptions following Japan’s earthquake had curbed auto production, and consequently sales. With gas prices lower, and motor vehicle output nearing pre-quake levels, consumers have more to spend, and car sales have shown renewed strength.

Consumer spending, which accounts for roughly 70% of the U.S. economy, grew at a 2.4% rate during the third quarter after slowing to a 0.7% pace in the second. This comes as consumer confidence continues to decline, recently hitting its lowest level since the worst of the recession.

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Furthermore, while some business surveys claim that factory output is contracting, recent data suggests that business spending is in fact picking up. According to the Commerce Department, business spending rose at a 16.3% pace during the last quarter, with companies spending more on equipment and software, and investing in nonresidential structures.