U.S. Economy: Third-Quarter Growth Revised Up on Spending Gains

The U.S. economy grew more than previously calculated in the third quarter, led by stronger consumer spending and fueled by labor income gains that may stoke demand into 2011.

The revised 2.5 percent increase in gross domestic product compares with a 2 percent estimate issued last month and a 1.7 percent rise in the second quarter, figures from the Commerce Department showed today in Washington. Consumer purchases rose at the fastest pace since the last three months of 2006.

Employee wages in the six months through September were revised up by about $59 billion, indicating Americans may ramp up their spending heading into the holiday shopping season. Along with gains in corporate investment in new equipment, the figures show an evolving expansion led more by demand and less by inventory restocking.

“You have a little firmer final sales -- that is the very encouraging part of the report,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It makes me a little more comfortable with the sustainability of the recovery.”

Separate figures from the National Association of Realtors showed the economy is not without its headwinds. Sales of previously owned homes fell more than forecast in October as foreclosure moratoriums and a lack of credit disrupted the U.S. housing market.

Purchases decreased 2.2 percent to a 4.43 million annual rate from 4.53 million in September. Economists projected sales would decline to a 4.48 million pace, according to the median forecast in a Bloomberg News survey.

Stocks Decline

Stocks fell for a second day after the home sales report and after North Korea fired artillery shells at a South Korean island. The Standard & Poor’s 500 Index dropped 1.5 percent to 1,180.12 at 12:29 p.m. in New York. The yield on the 10-year Treasury note, which moves inversely to prices, fell to 2.75 percent from 2.80 percent late yesterday.

Today’s third-quarter growth figures showed bigger gains in exports, consumer spending and business investment in new equipment than previously estimated.

Economists surveyed by Bloomberg projected the growth rate would increase to 2.4 percent, according to the median of 78 forecasts. Estimates ranged from 2 percent to 2.9 percent.

Consumer spending, which accounts for about 70 percent of the economy, increased at a 2.8 percent annual rate in the third quarter, the Commerce Department’s figures showed. The gain compares with a previously reported 2.6 percent rise and reflected an increase in purchases of used automobiles.

Wages Revised Up

Today’s figures also showed that in the second quarter, wages and salaries increased by a revised $97.4 billion from the prior three months of 2010, up from the $51.1 billion initially reported. The figures incorporate new, more comprehensive data from the Labor Department. Third-quarter wages increased by $51.4 billion, more than the $38.4 billion initially reported.

At the same time, corporate profits rose 2.8 percent after a 3 percent increase the second quarter, today’s report showed. Earnings were up 28 percent from the same time last year.

“Households are getting a little bigger share of the pie,” Feroli said. “For a more balanced recovery, it’s good to see households are getting a little more.”

Business spending on new equipment and software advanced at a 16.8 percent pace last quarter, compared with an initial estimate of 12 percent, today’s GDP report showed.

‘Slow, Steady’

“While we’re not expecting a rapid improvement in the economic environment, we do assume a slow, steady recovery throughout the year” in 2011, Ronald Sargent, chief executive officer of Staples Inc., said on a Nov. 18 teleconference to discuss earnings for the world’s largest office-supply retailer. “Core office supplies and computers and accessories were strong during the third quarter.”

Federal Reserve policy makers are concerned growth may not be strong enough to bring down an unemployment rate that held at 9.6 percent last month.

Joblessness is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Fed Chairman Ben S. Bernanke said in a speech in Frankfurt on Nov. 19. Bernanke defended the additional $600 billion in monetary stimulus the Fed announced earlier this month.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at an unrevised 0.8 percent annual pace in the third quarter, down from a 1 percent increase the prior quarter. The central bank’s longer-term projection is a range of 1.7 percent to 2 percent.

Black Friday

Wal-Mart Stores Inc., the world’s largest retailer, said yesterday that it will match prices listed in competitors’ ads on Black Friday, the day after Thanksgiving. Savings will begin with Thanksgiving Day online specials on Nov. 25 and will run through Nov. 27, with deals on electronics, home items and apparel.

Bentonville, Arkansas-based Wal-Mart is offering free shipping to homes on almost 60,000 holiday items through its website as it vies for budget-conscious shoppers.