US economic growth picked up in the third quarter as a late burst in consumer spending offset the first cutbacks in investment in more than a year by cautious businesses.

Gross domestic product expanded at a two per cent annual rate, the Commerce Department said yesterday, accelerating from the second quarter’s 1.3 per cent pace.

Still, the stronger pace of expansion fell short of what is needed to make much of a dent in unemployment, and details of the report did not bode well for an acceleration in output in the fourth quarter, as a spurt in government spending was seen as temporary.

A growth pace in excess of 2.5 per cent is needed over several quarters to make substantial headway cutting the jobless rate. Economists polled by Reuters had expected a 1.9 per cent growth pace in the third quarter. The report offers little cheer for the White House ahead of the closely contested November 6 presidential election, in which President Barack Obama is trying to fend off Republican challenger Mitt Romney.

US stock index futures pared losses after the data, while Treasuries briefly cut early price gains. The dollar trimmed losses against the yen and cut gains against the euro.

Since climbing out of the 2007-2009 recession, the US economy has faced a series of headwinds from high gasoline prices to the debt turmoil in Europe and, lately, fears of US Government austerity.

It has struggled to exceed a two per cent growth pace and remains about 4.5 million jobs short of where it stood when the downturn started.

Consumers, however, largely shrugged off the impending sharp cuts in Government spending and higher taxes, which are due at the start of the year absent congressional action.

Indeed, they went on a bit of a shopping spree as the quarter wound down, buying a range of goods – including automobiles and Apple Inc’s iPhone 5.

Consumer spending, which accounts for about 70 per cent of US economic activity, grew at a two per cent rate after increasing 1.5 per cent in the prior period.

High stock prices and firming house values have made households a bit more willing to take on new debt, supporting consumer spending. The faster pace of spending was achieved despite a spike in inflation pressures as gasoline prices rose. A price index for personal spending rose at a 1.8 per cent rate, accelerating from the second quarter’s 0.7 per cent pace.

But a core inflation measure that strips out food and energy costs slowed to a 1.3 per cent rate after rising 1.7 per cent in the prior quarter, suggesting the increase in overall price pressures will be temporary.

However, with about 23 million Americans either out of work or underemployed, the current pace of spending may not be sustained, especially if gasoline prices maintain their recent upward march and families get a higher tax bill in 2013.

Incomes were squeezed in the last quarter, causing households to save less to fund their purchases.

The amount of income available to households after accounting for inflation and taxes rose at a tepid 0.8 per cent rate in the third quarter, slowing after a brisk 3.1 per cent pace the prior period.

The saving rate slowed to 3.7 per cent after increasing to four per cent in the second quarter.

There was surprisingly good news on Government spending, which snapped eight straight quarters of declines on a strong rebound in defence outlays.

Government spending accounted for 0.7 percentage point of GDP growth. However, that might not be sustained given the austerity plans for next year. (Reuters)

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