Growth faster but not enough to dent joblessness

WASHINGTON (Reuters) - The economy grew faster than previously estimated in the third quarter, but a slump in sales of previously owned homes in October indicated the recovery remains too anemic to reduce high unemployment.

The Commerce Department on Tuesday revised its estimate of third-quarter growth in gross domestic product to a 2.5 percent annual rate from 2 percent to reflect stronger spending and exports than initially thought.

Concerns about slow growth and low inflation spurred the Federal Reserve early this month to launch a plan to buy $600 billion in government bonds and minutes of the November 2-3 meeting showed policymakers considered even more aggressive action to boost the economy.

Optimism over the acceleration in growth, which was a touch above economists’ forecasts for a 2.4 percent pace, was dampened somewhat by news of a bigger-than-expected drop in sales of previously owned homes last month.

“It’s a step in the right direction, but it’s not strong enough to make a dent in the unemployment rate,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “It supports the Fed’s decision to resume quantitative easing.”

Quantitative easing is the term economists use for the Fed’s asset purchase plan, a controversial program that some warn could spark inflation while doing little to create jobs.

Others have sided with the Fed. Nouriel Roubini, head of RGE Global Economics, told Reuters Insider the bond-buying plan was a “necessary evil” even though it would add only 0.3 percentage point to growth next year.

The Fed minutes also showed officials at the U.S. central bank cut growth forecasts for this year and 2011 and saw unemployment remaining elevated.

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Although there are signs economic activity picked up mildly as the fourth quarter started, growth will likely fall short of the more than 3 percent rate that economists say is needed to significantly cut the 9.6 percent unemployment rate.

GDP, which measures total goods and services output within U.S. borders, rose at a 1.7 percent rate in the second quarter.

Rising tensions on the Korean peninsula and worries over the euro zone’s sovereign debt crisis overshadowed the growth data in U.S. financial markets. Stocks fell more than 1 percent on Tuesday afternoon, while Treasury debt prices rose. The dollar hit a two-month high against the euro.

Economists are cautiously watching developments in Europe. When Europe’s debt crisis first flared in the spring, it slowed the U.S. economy’s recovery from its worst recession since the 1930s.

In October, sales of existing homes fell 2.2 percent to a 4.43 million unit annual rate. Economists had expected only a 1 percent drop.

Though housing remains a weak spot in the economy, consumer spending appears to be on solid footing.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.8 percent rate in the July-September period -- a pickup from the second quarter and the fastest pace since the fourth quarter of 2006 .

Data on Wednesday will likely show that spending maintained its firmer tone as the fourth quarter started and sales on Black Friday, the traditional start to the holiday shopping season, look set to be firm.

A woman shops at a Target store in New York November 22, 2010. REUTERS/Shannon Stapleton

“The rise in consumption suggests that household spending may be starting to gain some traction,” said Paul Dales, a U.S. economist at Capital Economics in Toronto.

Third-quarter growth also received a boost from government spending as state and local expenditures were revised up.

Business investment was a touch higher than initially estimated, lifted by much stronger spending on equipment and software, though investment in structures was weak.

But the contribution from business inventories was surprisingly smaller, which economists said signaled a shift toward more sustainable growth.

“Growth is not anymore being provided exclusively by temporary support factors, such as the stimulus program and private inventories, but is coming more and more from domestic demand,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

“The critical hand-off is under way. This is good news as it makes the recovery, as slow as it is, more sustainable.”

With growth still sluggish, inflation was subdued in the third quarter. The Fed’s preferred inflation measure, the personal consumption expenditures price index, excluding food and energy, rose at an unrevised annual rate of 0.8 percent.

That was the smallest increase since the fourth quarter of 2008 and the second-lowest since the fourth quarter of 1962.

The GDP report also showed after-tax corporate profits rose 1 percent in the third quarter after growing 3.9 percent in the April-June period.

Reporting by Lucia Mutikani; Editing by Kenneth Barry