consumer spending boosts third-quarter GDPThe U.S. economy registered a growth rate of 2% in the third quarter, as consumer spending increased at its best pace in about four years -- providing some hope that it's capable of helping maintain the expansion. The report was in line with economists' expectations.

Consumer spending increased at a 2.6% annual pace in the quarter -- its fastest pace since the fourth quarter of 2006, and up from 2.2% in the second quarter.

A Bloomberg survey had forecast third-quarter GDP to increase 2%, after posting increases of 1.7%, 2.7% and 5.6% in the second and first quarters of 2010, and fourth quarter of 2009, respectively. Investors should note that this is the first estimate of third quarter GDP growth. The U.S. Commerce Department revises its GDP estimates as it receives more information not available earlier.

Trade Subtracted From Overall Growth

The Commerce Department report attributed the slight increase in third-quarter GDP "personal consumption expenditures, private inventory investment, nonresidential fixed investment," and federal government spending. With imports growing faster (17.4%) than exports (5%), trade subtracted from GDP growth.

If the trade picture improves via increased exports and/or deceased imports, U.S. GDP growth would increase, all other factors being equal. Moreover, given the dollar's decline in the second half of 2010, exports may indeed fare better heading into 2011.

In current-dollar terms (not adjusted for inflation), U.S. GDP rose 4.2% in the third quarter, or $151.5 billion, to an annual rate of $14.73 trillion. In the second quarter, current-dollar GDP increased 3.7%, or $132.3 billion.

In addition to the third quarter's 2.6% consumer spending rise, outlays for durable goods jumped at an 6.1% annual rate, nondurable goods increased 1.3% and services climbed 2.5%. Also, business investment increased 9.7%, but that's down substantially from a 17.2% increase in the second quarter. Government spending rose 3.4%.

Also in third quarter, the U.S. savings rate slipped to 5.5% from 5.9% in the second quarter.

Setting the Stage for "QE2"

The preliminary third quarter report shows a U.S. economy that's gained some steam but still operating well below potential -- which economists call a substantial "output gap." The U.S. isn't growing strong enough to lower the high 9.6% unemployment rate. That would require a better-than-2.5% growth rate.

This is why the Federal Reserve is likely to move forward with a second phase of its quantitative easing program, or QE2, to stimulate the economy. The Fed Open Market Committee meets Nov. 2 and 3 to evaluate monetary policy, including the quantitative easing and short-term interest rates.

The economy's underperformance will also likely affect Tuesday's election and the balance of power in Washington. In a Gallup Poll conducted Oct. 21-24, 43% of adults surveyed listed the economy as their most important issue, 23% cited health care and 18% cited the size of the federal government.

Historically, when the economy is in poor shape and unemployment is high, voters hold the party in power responsible. That theory is likely to hold once again in 2010. The Democrats are projected to lose 40 to 50 seats in the House and six to eight in Senate, the former shifting control of the House to Republicans.

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2% growth is failure

October 29 2010 at 2:59 PM Report abuse +2 rate up rate down Reply
1 reply to marine1942's comment

Ya know how much the economy grew under Bush per quarter? The average was 1.94%... I guess he failed as much as the new idiot President has.

October 29 2010 at 3:31 PM Report abuse +1 rate up rate down Reply

How many of you Liberals know that there is a bill in the House, that if passed and signed into law, will charge your bank accounts a 1% fee for every transaction you make. It will charge your 401K Account, or any other investment account you have a 1% fee. It will charge a 1% fee for every purchace you make with a credit card. The list goes on. It was written by a Democrat. It was Obama who said no one under $200,000.00 would have any taxes increased. However, they have found a way to get more money from everyone, without calling it a tax. And you think the Republicans and canservatives are the bad ones?

October 29 2010 at 2:57 PM Report abuse +1 rate up rate down Reply
2 replies to jerrym930's comment

That bill has been proposed every year by Rep. Fattah (D. PA) since 2004 as the "Debt Free America Act". In all that time it has gained only one co-sponsor and never made it out of committee. Wish you fear mongers would research some the these wild stories you post.

October 29 2010 at 4:01 PM Report abuse +2 rate up rate down Reply

Wonder what will happen when the Republicans take over and nothing changes?

October 29 2010 at 2:51 PM Report abuse +2 rate up rate down Reply
4 replies to napoleon3373's comment

Shirley - I forgot to mention that the Democrat platform is this. Pass as many social welfare programs as possible, in order to buy votes from people who receive them benefits of these programs. Raise taxes as much as possible to pay for these programs, and borrow the difference. Let future generations worry about paying off the debt, as long as we can stay in power by buying votes. They have no clue what it takes to make people have responsibility for their own lives. If that ever happened, then the Democrats would have no platform.

October 29 2010 at 1:43 PM Report abuse rate up rate down Reply
1 reply to jerrym930's comment

it was Bush who created 5.6 trillion in debt and that doesnt count the two wars and med part d and in the end lost far more jobs than he created

October 29 2010 at 4:26 PM Report abuse +2 rate up rate down Reply

well i guess after how many trillions dumped? sorry lost count, 2% is good? something is not right. if the money and low interest rates would have been given to the middle man it would be a 200% growth and now the fed again heating up the printing press to hand out more free money to the ones claiming record profits and bonuses...wake up america or start teaching your children to speak chinise

October 29 2010 at 1:40 PM Report abuse +3 rate up rate down Reply

Bush actually helped the economy even though he isn't in office... good for him. LOL!

October 29 2010 at 12:56 PM Report abuse rate up rate down Reply

The sad thing, for the entire country, is the administration in power will get absolutely no credit for this. The spin doctors will some how make it appear this happened in spite of what the administration has done, not because of it. Folks will go to the polls on Tuesday, whipped into a frenzy of fear and hate fueled by Republicans and Tea partiers, and vote for 'change'. The only change that will happen is all of the work that has been done to bring the economy out of the slump will be undone. The country will regress instead of progress, guessed it...the democrats will get the blame. Remember when Bush took office? His first order of business was to undo everything Clinton had done, with no regard to merit. If it happened under Clinton, it must be bad, and we all know how that worked out. They are going to do the same thing if allowed back in office. Folks better be careful what they wish for.

October 29 2010 at 12:54 PM Report abuse +3 rate up rate down Reply
3 replies to rockywalter2327's comment

The only reason this happened is because any republican president from the past helped it. Even one from 125 years ago. Any immediate bad thing is Obama's fault. God bless the United States of Me(Isn't that how it goes?

October 29 2010 at 12:24 PM Report abuse +1 rate up rate down Reply

The economy gained steam in the last (3rd) quarter. Do we continue to let the economy grow after the election?? Or do we institue massive spending cuts which drastically reduce the number of public sector jobs-as the Tea-Bag party suggests. Then how long would the spending cuts take to begin additional growth of private sector jobs?? Of course, those who lose their public sector jobs could not purchase anything, which would at least temporarily SLOW the growth of the economy, and increase the number of people employed-if you call those in public-sector jobs people. Georgeroll

October 29 2010 at 10:59 AM Report abuse -2 rate up rate down Reply
2 replies to georgetroll4's comment

must be all that steam can't see the growth thru it

October 29 2010 at 1:34 PM Report abuse rate up rate down Reply

By your logic, we should all be public sector workers. So, we all go on the government payroll, making an average of $70,000.00. We pay the government 25% in taxes, or $14,000.00. That is a net loss in the government till of $56,000.00 per person. So, the government has to borrow more money to make it's payroll, because the well is running dry. The only way to get the government out of deficit spending and pay down the debt is to have more people working in the pricvate sector, and fewer on government payrolls and fewer on government social welfare rolls. I have been around for quite some time. Since the Democrats expanded social welfare programs in the 1960s, our government has been in deficit spending mode. The few years of surplus under Clinton was brought about buy cutting government spending and the DOT.COM bubble increasing revenue from capital gains taxes. Once that bubble burst, and the Republicans became free spending Democrats, the deficits returned with a vengence. Obama and the Congressional Democrats have only stepped on the deficit spending accelerator.

October 29 2010 at 1:57 PM Report abuse rate up rate down Reply