GDP Growth Revised Lower to 2.8%

By LUCA DI LEO and JEFF BATER The U.S. economy's recovery wasn't as strong as earlier believed, the government said Tuesday, revising its third-quarter numbers to show a wider trade deficit and lower consumer spending than previously estimated. Gross domestic product rose at a 2.8% annual rate July through September after falling by 0.7% in the second quarter, the Commerce Department reported. A month ago, the department first estimated that GDP rose by an annual 3.5% in the third quarter. The new figure was in line with forecasts. Economists surveyed by Dow Jones Newswires were expecting the GDP revision to show growth of 2.7%. Although the data confirmed that the economy expanded for the first time in more than a year as the government's stimulus boosted consumer spending, the latest report showed that motor vehicles spending in September was lower than had been estimated. Overall consumer spending rose a quarterly 2.9% in the third quarter and contributed 2.1 percentage points to GDP at annual rates, the new figures show. That compares to earlier estimates that spending had risen a quarterly 3.4% and contributed 2.4 percentage points to GDP. A wider trade deficit, with an upward revision to imports offsetting an upward revision to exports, and lower nonresidential business investments also contributed to the lower third-quarter GDP number. Still, the rise in GDP was the first since the second quarter of 2008 and the strongest in nearly two years. The U.S. is emerging from its worst recession since the Great Depression. Persistently high unemployment and a fading government stimulus, however, are expected to keep a lid on consumer spending, a key growth engine in the world's largest economy. A survey released Monday by the National Association for Business Economics showed that 48 forecasters from companies and academia expect the U.S. recovery to firm in 2010, but that unemployment won't fall until the second half of next year. The economy should expand by 2.9% in 2010 thanks to strength in the housing sector and business investments, after contracting 2.4% this year, the NABE survey said. That compares with a forecast made Oct. 24 that GDP would rise by 2.6% next year. Home resales leaped to the highest rate in more than two years during October as buyers emboldened by a big tax credit pushed aside fears of unemployment, data showed Monday. As a result, analysts at Macroeconomic Advisers upped their fourth-quarter GDP forecast slightly to an annual 3.1%. But with more than 7.3 million jobs lost since December 2007, 61% of the NABE panelists said they don't expect a complete recovery in the jobs market until 2012. A jobless rate at a 26-year high of 10.2% in October is expected to keep a lid on consumer spending. Federal Reserve Chairman Ben Bernanke last week warned the U.S. may be at risk of a so-called "jobless recovery", in which output is growing but employment doesn't increase. The government's first estimate of fourth-quarter GDP -- and for 2009 as a whole -- will be released Jan 29. The final estimate for third-quarter GDP will be published Dec. 22. Most Fed officials have underscored in recent weeks that interest rates will stay close to a record low near zero for some time due to a fragile recovery and low inflation. Tuesday's report showed gauges measuring third-quarter price inflation were subdued. The government's price index for personal consumption increased 2.7% in July through September, compared to the previously estimated 2.8% climb and the second quarter's 1.4% rise. The core PCE gauge, which excludes volatile food and energy prices, increased 1.3% in the third quarter, compared to the previously estimated 1.4% climb and the second quarter's 2.0% rise. The Fed is set to release its new economic forecasts for inflation, growth and unemployment later Tuesday. Write to Luca Di Leo at luca.dileo@dowjones.com and Jeff Bater at jeff.bater@dowjones.com