US economic growth up sharply in third quarter

Barack Obama and Mitt Romney at the Hofstra debate 16 October 2012 Mr Obama and Mr Romney have clashed on the health of the US economy

The US economy grew more than expected in the three months to September, official figures showed.

The world's largest economy expanded at an annualised rate of 2% in the third quarter, the Commerce Department said.

The jump was partly due to a large increase in government spending.

The figures are one of the last pieces of important economic data before the US presidential election between Barack Obama and his challenger Mitt Romney on 6 November.

Federal government expenditures and gross investment increased 9.6% compared with the previous quarter, while national defence spending rose by 13%. The Commerce Department said there was a jump in personal consumption as well.

A drought in the US, which was the worst for 50 years, cut farm output and took 0.4 percentage points off the GDP figures, the Commerce Department said.

With more than 20 million Americans unemployed and a huge public deficit, the economy has become one of the central issues of the campaign.

The US has now been growing for more than three years, since June 2009.

Analysis

In political terms, today's figures probably don't change much.

They offer yet another snapshot of an economy that's growing, but growing too slowly for comfort or for any particular optimism. And it's been like this for 13 quarters.

Since mid-2009, growth in the US has averaged 2.2% per year. There has been a shift though.

Instead of businesses, it is now consumers and housing that are providing the growth. Companies are increasingly cautious.

That may be because of the dreaded "fiscal cliff" - a bunch of tax hikes and spending cuts that go in to effect in the new year unless Congress acts.

The economy simply does not have enough momentum to absorb the shock from going over the fiscal cliff without going into recession.

"While we have more work to do, together with other economic indicators, this report provides further evidence that the economy is moving in the right direction," said Alan Krueger, chairman of President Obama's Council of Economic Advisers.

But the Romney camp was not impressed. "Slow economic growth means slow job growth and declining take-home pay," Mr Romney said in a statement. "This is what four years of President Obama's policies have produced."

Speaking at a rally on Friday in the state of Iowa he said the growth figure was disappointing and that he could do better.

Economic fight

Mr Romney has repeatedly challenged President Obama's record, saying ''we have not made the progress we need to make''.

"If the president were re-elected, we'd go to almost $20 trillion (£12.4tn) of national debt. This puts us on a road to Greece," Mr Romney said during the second presidential debate.

Mr Obama replied that his opponent did not have a five-point plan to fix the economy, but ''a one-point plan''.

Last month, the US unemployment rate fell to 7.8%, down from 8.1%, its lowest since January 2009 when Mr Obama's term in office began.

Nigel Gault, chief US economist at IHS Global Insight, said: "There is prospect that we could do better next year if we could clear up some of the uncertainties, particularly the fiscal cliff.

"A lot of the ingredients for stronger growth are falling into place, particularly the gradual easing of credit conditions and the improvement in the housing market."

The "fiscal cliff" refers to automatic tax hikes and government spending cuts that were agreed by Democrats and Republicans during the last budget face-off. They will drain about $600bn out of the economy next year, possibly plunging the US economy into unless action is taken by Congress.

Chris Williamson, chief economist at financial research firm Markit, said there was no certainty that this pace of growth would be maintained: "It remains too early to tell whether growth will accelerate or slow in the fourth quarter.

"However, it seems unlikely that the consumer mood will continue to brighten if not supported by evidence that the corporate sector is also seeing stronger growth, suggesting there are downside risks and the GDP growth rate could slow from the third quarter's 2% pace."

Low interest rates

To help get the US economy back on track, the US Federal Reserve in September restarted its policy of pumping money into the economy via quantitative easing. The Fed pledged to buy $40bn of mortgage debt a month, with the aim of reducing long-term borrowing costs for firms and households.

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By now, people know what they think of the state of the economy. It is what - or who - could make it better. That is the question”

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"Growth was fairly resilient," said Christopher Vecchio, a currency analyst at DailyFX, but "nevertheless, this is still not the stable recovery the Federal Reserve is looking for".

Recent housing data has also shown some encouraging signs of recovery, analysts say.

Sales of existing homes and housing construction have picked up and the main home price index has risen consecutively for three months.

House prices have rebounded in some areas, while mortgage rates are expected to stay at record lows because of low interest rates.

The Fed has vowed to keep rates at the current levels of close to zero until 2015.

The economy grew by 1.3% in the previous quarter. The US states its growth in annualised terms, meaning that its quarterly growth rate is extrapolated as if it was growing at that pace for the whole year.

By way of rough comparison, that means the US grew by about 0.5% from the previous three months on a quarterly basis. During the same quarter, the UK grew by 1%,

Figures for the eurozone have not yet been released but Germany is expecting a "noticeable expansion" and debt-ridden nations like Spain and Greece will likely have shrunk again.

China, the world's second-biggest economy, also uses an annualised rate of growth. It expanded 7.4% in the third quarter.

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