The economy in the U.S. expanded more than forecast in the thirdquarter, paced by a pickup in consumer spending, a rebound ingovernment outlays and gains in residential construction.

Gross domestic product, the value of all goods and servicesproduced in the U.S., rose at a 2 percent annual rate afterclimbing 1.3 percent in the prior quarter, Commerce Departmentfigures showed today in Washington. The median forecast of 86economists surveyed by Bloomberg called for a 1.8 percent gain.

A housing rebound is helping mend Americans' finances andconfidence, indicating the pickup in demand for expensive itemssuch as automobiles can be sustained. The data is likely to play arole in the upcoming election, allowing President Barack Obama tosay the economy is heading in the right direction, while challengerMitt Romney may argue growth is not fast enough.

“The economy is expanding, but expanding slowly,” Nigel Gault,chief U.S. economist at IHS Global Insight in Lexington,Massachusetts, said before the report. “We have moderate growth inconsumer spending, and one of the previously disastrous areas,housing, is picking up.”

The rate of growth would have been stronger if not for thedrought that affected crops in the Midwest. A drop in farminventories subtracted 0.4 percentage point from third-quarter GDPafter cutting 0.2 point in the prior period, the report showed.

Economists' estimates for GDP ranged from 0.9 percent to 3.1percent. The GDP estimate is the first of three for the quarter,with the other releases scheduled for November and December whenmore information becomes available.

Consumer purchases, the biggest part of the economy, grew at a 2percent annual rate, up from a 1.5 percent second-quarter gain andcompared with a 2.1 percent median forecast in the Bloombergsurvey. Purchases added 1.4 percentage point to growth.

Retail sales in September and August had the best back-to-backshowing since late 2010 as shoppers snapped up goods from cars toApple Inc.'s iPhones. Target Corp., the second-biggest U.S.discounter, was among chains topping analysts' estimates forsame-store sales last month.

Cars and light trucks sold at a 14.9 million annual pace inSeptember, the strongest since March 2008, according to Ward'sAutomotive Group. Chrysler Group LLC and General Motors Co.reported gains. Record-low mortgage rates are stoking demand forhousing, another area of the economy that's improving. Firming homeprices and a drop in joblessness may further boost Americans'confidence and spending.

Disposable Incomes

At the same time, consumers' purchasing power eased, withdisposable income adjusted for inflation rising at a 0.8 percentannual rate from July through September, the least since the end of2011, after a 3.1 percent gain in the second quarter, today'sreport showed. The saving rate fell to 3.7 percent from 4percent.

Spending by the federal government also rebounded, led by a jumpin defense outlays. It grew at a 9.6 percent rate, the most sincethe second quarter of 2010. Total public expenditures climbed at a3.7 percent pace the most in three years.

Residential construction increased at a 14.4 percent rate, upfrom an 8.5 percent gain in the prior period.

One area of mounting concern is business investment andmanufacturing.

Corporate spending on equipment and software was unchanged, theweakest reading in three years, today's report showed.

Data yesterday showed orders for non-defense capital goodsexcluding aircraft, a proxy for future corporate spending on itemslike computers, engines and communications gear, stagnated inSeptember and shipments fell.

Honeywell International Inc., a maker of turbochargers andcockpit controls, cut its annual sales estimate on weaker demandfor aerospace parts and falling auto production in Europe.

“Turning to 2013, the clarity on the macro side is still murky,”Honeywell Chief Executive Officer Dave Cote said on an Oct. 19conference call with analysts. “There's nothing out there tosuggest anything but continued conservative planning at best.”

Caterpillar Inc., the world's largest maker of construction andmining equipment, this week projected sales growth for 2013 thatwould be slower than the prior three years. Production has beentrimmed, with temporary shutdowns and dismissals to work throughexcess stockpiles, the Peoria, Illinois-based company said.

Profit Projections

Others who lowered profit projections include 3M Co., themanufacturer of products ranging from Scotch tape to dental braces,and DuPont Co., the most valuable U.S. chemical maker, which alsoannounced 1,500 job cuts.

In addition to slowing growth from Europe to Asia that willlimit exports, the U.S. is approaching more than $600 billion intax increases and spending cuts set to take effect early next yearunless Congress acts.

The trade deficit expanded as exports dropped, subtracting 0.2percentage point from third-quarter growth, today's reportshowed.

Today's report will be the last reading on the state of theeconomy before Americans go to polls next month. Employment andgrowth are central themes in the campaigns ahead of the Nov. 6elections.

The jobs data for October are scheduled to be released by theLabor Department on Nov. 2. Payrolls rose 114,000 in Septemberafter climbing 142,000 in August, while the unemployment ratedropped to a three-year low of 7.8 percent from 8.1 percent.

Federal Reserve policy makers highlighted the advance inconsumer spending and slowdown in business investment in the Oct.24 statement after their meeting. They pledged to keep buying $40billion in mortgage-backed securities a month in a bid to spur thethree-year expansion and reduce joblessness.

“Economic activity has continued to expand at a moderate pace,”the Fed said. “Growth in employment has been slow, and theunemployment rate remains elevated.”

Bloomberg News

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