Economy in U.S. Surpasses Pre-Recession Level

By Timothy R. Homan and Ilan Kolet - Oct 28, 2011 11:00 AM GMT+0700

The value of goods and services produced in the U.S. surpassed its pre-recession level after 15 quarters, taking three times longer than the average for 10 previous recoveries since World War II.

Gross domestic product expanded at a 2.5 percent annual rate in the period from July through September, the Commerce Department reported yesterday, the fastest pace in a year and up from 1.3 percent in the prior three-month period. After adjusting for inflation, GDP climbed to $13.35 trillion last quarter, topping the $13.33 trillion peak reached in the last three months of 2007.

“The American economy finally has accomplished the recovery and has now entered the expansion,” said Neal Soss, chief economist with Credit Suisse in New York, who was an aide to former Federal Reserve Chairman Paul Volcker. “But the growth is clearly too slow to solve the most significant problems the economy faces: jobs and getting the public budgets under control.”

Consumers reduced savings to boost purchases and companies stepped up investment in equipment and software, even as the biggest drop in incomes in two years raises concerns about whether the spending increase will continue. The number of Americans with jobs last month, 131.3 million, was lower than the 138 million workers in December 2007, when the 18-month recession began, according to Labor Department data.

Stocks surged yesterday as European leaders agreed to expand a bailout fund to stem the region’s sovereign debt crisis. The Standard & Poor’s 500 Index jumped 3.4 percent to 1,284.59, extending the biggest monthly rally for the gauge since 1974. Treasuries sank, pushing the yield on the 10-year note up to 2.39 percent from 2.21 percent the day before.

Average Growth

The U.S. economy expanded at an average 0.9 percent rate in the first half of 2011, the worst performance since the recovery began in June 2009. Growth needs to exceed 2.5 percent to reduce the jobless rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.

Unemployment stuck around 9 percent or higher for 30 months explains why Federal Reserve policy makers, who meet next week, and the Obama administration are considering additional measures to boost the economy.

“We are well below potential output,” said Ben Herzon, an economist at Macroeconomic Advisers LLC, the St. Louis-based forecasting firm cofounded by former Fed Governor Laurence Meyer. “The time to get excited is when everyone who is looking for work has got work.”

Business Spending

Corporate investment in equipment and software was a bright spot in yesterday’s report, climbing at a 17.4 percent pace, the most in a year.

Profits for companies in S&P 500 rose 16 percent on average in the three months ended Sept. 30, based on results reported so far. Earnings are beating analyst predictions by 5.5 percent, compared with a rate of 3.3 percent since 2005, the data show.

A pickup in investment hasn’t translated into more jobs. Payrolls rose by an average 96,000 workers per month last quarter, down from the 166,000 average in the first quarter.

Household purchases, the biggest part of the economy, increased at a 2.4 percent pace, more than forecast by economists.

“Because the strength was led by consumers, the economy’s outlook is much better than we had previously thought,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.

The savings rate last quarter dropped to 4.1 percent, the lowest since the last three months of 2007. After-tax incomes adjusted for inflation decreased at a 1.7 percent annual rate, the biggest drop since the third quarter of 2009.

Keeping Prices Down

McDonald’s Corp. (MCD), the world’s biggest restaurant chain, is among companies trying to keep prices down to attract budget- conscious customers. The Oak Brook, Illinois-based company this month said third-quarter profit gained 8.6 percent.

“The environment out there is still fragile,” James Skinner, McDonald’s vice-chairman and chief executive officer, said in an Oct. 21 call with analysts. “Consumers everywhere continue to be cautious and hesitant to spend.”

President Barack Obama this week said he is seeking ways to take action without congressional approval after the Senate blocked his $447 billion jobs bill earlier this month. The steps include altering a program to help homeowners refinance mortgages and easing the burden of student loans.

Easing Options

Fed policy makers are developing options for further monetary easing even as the economy picks up.

Vice Chairman Janet Yellen said last week that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”

Policy makers pledged in August to hold the benchmark interest rate near zero through the middle of 2013 so long as joblessness stays high and the inflation outlook is “subdued.” On Sept. 21, they announced a plan to replace debt in the central bank’s portfolio with longer-term Treasuries to help cut borrowing costs.

Companies also kept a tight rein on stockpiles last quarter, making it less likely that production will have to be cut back. Inventories were built at a $5.4 billion annual pace, down from the second quarter’s $39.1 billion rate, according to yesterday’s GDP report. The reduction subtracted 1.1 percentage points from growth.

Excluding inventories, the economy grew at a 3.6 percent annual rate last quarter, up from a 1.6 percent in the April through June period.

A narrower trade deficit contributed 0.2 points to GDP. Government spending stagnated, continuing to restrain growth. A 2 percent gain in federal outlays was offset by a 1.3 percent drop in spending by state and local agencies.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Ilan Kolet in Ottawa at ikolet@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net