Mild increase in economic growth expected in Q3
The economy likely expanded at a greater rate last quarter as Americans loosened a tight grip on their wallets.business Updated: Oct 29, 2010 12:00 IST
The economy likely expanded at a greater rate last quarter as Americans loosened a tight grip on their wallets.
But the expected pickup in growth wasn't strong enough to make a noticeable dent in high unemployment.
Leading economists polled in a new AP Economy Survey predict the economy expanded at an annual rate of 2 percent in the July-September quarter.
That would mark an improvement from the feeble 1.7 per cent growth rate logged in April-June period. To knock down the unemployment rate, however, growth would need to be at least twice as fast as the 2 percent rate expected for the third quarter.
Looking ahead to the current quarter, economic growth isn't expected to be much better, logging just a 2.4 percent pace, according to the AP survey.
If that's that case, the economy will end 2010 on weaker footing than it started. In the first quarter, the economy expanded at a 3.7 percent pace.
"It's a half-speed economic rebound," said Brian Bethune, economist at IHS Global Insight.
One year after the recession ended, the economy has failed to generate the kind of growth needed to ratchet down unemployment and bring relief to the nearly 15 million Americans now out of work. The unemployment rate averaged 9.6 percent in the third quarter, down only a notch from the 9.7 percent average for the second quarter. That's why the Federal Reserve is widely expected on November 3 to announce a second round of government bond buying.
The program will pump billions of dollars into the economy. Doing so will lower rates on mortgages and other loans.
Anticipation of the Fed's action has already helped push down mortgage rates to their lowest levels in decades. The Fed hopes that cheaper credit will spur people and companies to boost their spending, which would strengthen the economy.
Even if the Fed's plan works, economists said it is likely to provide only a modest boost to economic growth -- perhaps a couple tenths of a percentage point -- in the final quarter of this year.
Still, the extra economic activity wouldn't be sufficient to drive down unemployment, economists said.
The rate is still expected to be above 9 percent by the end of this year, even with new Fed aid.
The Commerce Department releases its first estimate of the third-quarter's performance on Friday morning -- just days before the nation goes to the polls on Tuesday to elect a new Congress. Angry voters could cost Democrats their control of the House of Representatives, and maybe the Senate.
The weak economy means Americans with jobs are seeing scant wage gains and those without are facing fierce competition for the few openings that become available. Home foreclosures have soared.
"With this kind of economic growth, we're in for a long, painful haul," said Sean Snaith, an economics professor at the University of Central Florida. "This kind of slow growth can only chip away at the unemployment rate. Growth must be much more robust to really bring it down."
Under one rule of thumb, the economy would need to expand by 5 percent for a full year to knock the jobless rate down by a full percentage point.
For all of this year, the economy is expected to grow 2.6 percent. That would mark an improvement from 2009. The gross domestic product shrank that year by an equal amount, the largest annual decline since 1946. GDP measures the values of all goods and services -- from machinery to manicures -- produced in the United States.
The slight pickup anticipated in third-quarter growth would mainly reflect a mild uptick in consumer spending. A stock-market rebound made people feel better about spending, and bargains -- from cars to electronics -- also drew them out. Consumer spending probably rose at a 2.4 pace, up from a 2.2 percent rate in the second quarter.
For a robust economic rebound, consumers would need to spend at a pace closer to 5 percent.
Business spending, however, probably cooled. Analysts believe businesses didn't spend as much on equipment and software, after logging double-digits gains in the prior three quarters. Businesses also probably cut spending at a faster pace in the third quarter on commercial construction projects like office buildings and factories.
And, spending on home building is likely to shrivel, acting as a restraint on overall growth.
First Published: Oct 29, 2010 11:57 IST