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Economy grew at 2 percent rate in third quarter

WASHINGTON — The U.S. economy grew more slowly over the summer than the government had earlier estimated because businesses cut back more sharply on restocking of shelves.

The Commerce Department said Tuesday that the economy expanded at an annual rate of 2 percent in the July-September quarter, lower than an initial 2.5 percent estimate made last month. The government also said after-tax incomes fell by the largest amount in two years, reflecting high unemployment and lower pay raises.

The downward revision was largely because weaker data on inventory building came in after the government's first estimate. Many businesses reduced their stockpiles over the summer, probably because they didn't anticipate the strength of consumer and business spending.

A decline in inventories is not always a bad sign. Economists think this could lead to stronger growth in the current quarter, if businesses foresee more demand and restock their shelves.

Economists predict growth will strengthen to about 3 percent in the October-December quarter. Many raised their estimates after seeing encouraging October reports on retail sales and factory output.

"While this report is disappointing, it is a look back in time," said Jennifer Lee, senior economist at BMO Capital Markets. "It is encouraging, to say the least, to see the October data coming in stronger, which is good news for the current quarter."

Still, growth could be slowed if consumers continue to earn less. After-tax, inflation-adjusted incomes fell at a 2.1 percent rate. That's steeper than the 1.7 percent decline initially estimated and the biggest drop since the third quarter of 2009, just as the recession was ending. It also marked the second straight quarterly decline.

"For now the U.S. economy looks to be moving in the right direction," said Paul Ashworth, chief U.S. economist at Capital Economics, who predicts growth of more than 3 percent in the fourth quarter.

But the January-March quarter "could be a different story, particularly if the payroll tax cut isn't extended," Ashworth said.

The modest third-quarter growth is not nearly enough to lower the unemployment rate, which has been stuck near 9 percent for more than two years. And economists caution that their brighter outlook hinges on Europe's financial crisis, which could trigger a recession in that region and slow U.S. growth next year.

Economy grew at 2 percent rate in third quarter 11/22/11 [Last modified: Tuesday, November 22, 2011 10:32pm]

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