The value of goods and services in the U.S. surpassed its pre-recession level last quarter for the first time in 15 quarters. While the news is a positive sign for the economic recovery, it took three times longer than the average for 10 previous recoveries since World War II.
Hot Feature: Consumer Spending Pumped Up Economy in Third Quarter
Yesterday the Commerce Department reported that gross domestic product expanded at a 2.5% annual rate during the July-September period, the fastest pace in a year and up from a 1.3% annual rate during the second quarter. After adjusting for inflation, GDP rose to $13.35 trillion last quarter, slightly topping the $13.33 trillion peak reached in the last three months of 2007.
“The American economy finally has accomplished the recovery and has now entered the expansion,” said Neal Soss, chief economist with Credit Suisse in New York, following the report. “But the growth is clearly too slow to solve the most significant problems the economy faces: jobs and getting the public budgets under control.”
Consumer spending gave the economy its much-needed boost last quarter, though a large amount of that spending was likely due to pent-up demand, which may begin to fizzle in early 2012. Consumer spending makes up roughly 70% of the U.S. economy, and so has the ability to make or break the recovery. Still, despite the biggest drop in incomes in two years, and the continually high unemployment rate, consumers reduced savings and spent more during the third quarter.
The U.S. economy expanded at a 0.9% rate during the first half of 2011. Growth needs to exceed 2.5% to reduce the jobless rate, according to estimates by Kurt Karl, chief economist at Swiss RE in New York. For the last thirty months, unemployment has hovered around 9%, and until that number begins to improve, the economy won’t truly recover. For that reason, Federal Reserve policy makers, who meet next week, and the Obama administration are considering stimulus measures meant to give the economy a jump start and hopefully encourage job creation.
However, profits for companies on the S&P 500 rose an average of 16% during the last quarter, based on results reported so far, and yet that resulted in few new jobs. So far, earnings are beating analysts predictions by 5.5%, compared to a rate of 3.3% since 2005. But payrolls rose by an average of 96,000 workers per month last quarter, down from the 166,000 average during the first quarter of 2011.
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Corporate investment in equipment and software rose at a 17.4% pace, while household purchases, the biggest part of the economy, grew more than forecast at a 2.4% pace. The increase in consumer spending meant the savings rate last quarter dropped to 4.1%, the lowest since the last three months of 2007, before the recession, and this despite the fact that after-tax incomes, adjusted for inflation, decreased at a 1.7% annual rate, their biggest drop since the third quarter of 2009.