Economic Growth Still Remains Modest

In Q3 2012, the U.S. economy grew at a faster, but still modest, annual rate of 2 percent spurred by improved consumer spending and the federal government. Despite the 0.7 percent increase over Q2, the economy remains too weak to create the jobs necessary to lower the unemployment rate. The annual growth rate of 1.74 percent over the first nine months of 2012 is slightly lower than the 1.8 percent measured in 2011, which also trailed 2010’s growth of 2.4 percent. Though the economy is steadily improving, it is showing few signs of gaining momentum.

“We suspect that growth will slow a little in the fourth quarter and expect it to remain close to 2 percent next year,” said Paul Ashworth, chief U.S. economist at Capital Economics.

A partial explanation for the Q3 growth was the increase in consumer spending by an annual rate of 2 percent; a 0.5 percent jump over Q2. Homebuilding and renovations spending increased at an annual rate of more than 14 percent. Federal spending also surged due to an increase in defense spending that was the highest in three years.

However, exports experienced their largest drop in three years and business investments in equipment and software remained flat. The economy was also slowed by last year’s drought in the Midwest which cut agricultural stockpiles and reduced growth by almost half a percentage point. Once crop supplies return to normal, however, the economy should experience a notable boost.

Economic growth is expected to remain sluggish at least through the first half of 2013 but analysts hope that by then the present Congressional gridlock over tax and spending cuts will be resolved, potentially encouraging a return of business investment and hiring. But even if this occurs, the economy is still slowed by consumer efforts to spend less and save more in order to pay off debts. Banks also remain cautious about lending, directly contributing to the slow economic recovery.