U.S. Economy Grows But at Slower Pace Than Expected

Americans rekindled their love affair with new cars, helping push U.S. economic growth ahead during the third quarter at more than twice the anemic rate of the second quarter, the Commerce Department reported Thursday -- but the pace was weaker than expected.

Gross Domestic Product, which measures total output within U.S. borders and is the broadest gauge of total economic performance, climbed at a 3.1 percent annual rate in the three months from July to September, well ahead of the preceding quarter's 1.3 percent rate.

But the third-quarter growth rate came in below Wall Street economists' forecasts for a 3.6 percent rate of GDP advance and may foreshadow a slower fourth quarter, with many private analysts already predicting growth will slow to the 1 percent to 2 percent range.

"The largest contributors to the step-up were an acceleration in consumer spending — especially for motor vehicles — and a slowdown in imports," the Commerce Department said.

Separately, the Labor Department said its Employment Cost Index, measuring what employers pay in wages, salaries and benefits, rose at 0.8 percent rate during the third quarter. That was down from 1.0 percent in the second quarter.

The GDP report showed consumer spending grew at a 4.2 percent annual rate in the third quarter, up from a 1.8 percent rate of gain in the second quarter and was the key influence on the improved quarterly GDP performance.

Consumers have been the mainstay of economic growth for the past several quarters, but slow growth in employment and weak consumer confidence measures have raised concern that spending may weaken in coming months.

Recently, speculation has mounted that Federal Reserve policymakers may cut U.S. interest rates by year-end to help keep Americans spending into the approaching holiday shopping season in hope this will keep growth going until business investment picks up.

The Fed's policymaking Federal Open Market Committee meets next Wednesday to consider interest-rate strategy and also has a meeting in December.

"The GDP data keep the door open to the rate cut, as do the inflation data in the employment cost index," said economist Mark Chandler of Scotia Capital Markets in Toronto. "They suggest that we are heading into a weak fourth quarter."

Carol Stone, an economist with Nomura Securities International in New York, said recent reports showed auto sales softening and the GDP's forward momentum waning.

"The economy is just sitting here dead in the water," Stone said, "It is floating; it's not sinking."

SOME BRIGHT SPOTS

There were some signs in the third-quarter GDP report that suggested businesses may be starting to modestly raise investment spending — something economists say is vital to keep economic momentum intact.

Overall nonresidential private investment — spending on factories and equipment — edged ahead for the first time in two years. Within that category, spending on equipment and software increased for a second straight quarter during the July-September period, rising at its fastest pace since the second quarter of 2000.

Businesses added to inventories at a $1.9 billion annual rate in the third quarter, slower than the second quarter's $4.9-billion rate of addition.

Inflation remained muted. The closely watched PCE price index advanced at a 1.9 percent annual rate, down from 2.7 percent in the second quarter. The "core" PCE price index that strips out food and energy costs rose at a rate of 1.9 percent in both the second and third quarters.

Reuters contributed to this report.