Third-quarter GDP rises 2%, better than expected

• Consumer spending, improving housing market aid growth
• Business investment flat, keeps job creation down
• Consumer confidence rises to highest level in five years in October

The nation's gross domestic product grew at an annual rate of 2% during the third quarter, the government said today, in one of the final pre-election looks at how the economy is recovering from the recession.

The results beat the 1.8% median forecast of 48 economists surveyed by USA TODAY.

But although third-quarter GDP beat expectations, growth is still well below the annual pace of 3% or better that economists consider necessary to create a strong economy and lower the unemployment rate.

Consumer spending, which has the biggest impact on economic growth, rose 2% last quarter after rising 1.3% in the second quarter. And investment in housing jumped 14.4% to help lead the way. Indeed, housing accounted for all of the economy's gains in investment during the quarter -- and then some.

"The quick reaction is that the economy is slowly getting better,'' said Joel Naroff, president of Naroff Economic Advisors. "It has turned the corner in so many different ways.''

A sharp 1.6% decline in exports and a drop in business investment, excluding housing, held back growth. Investment in business equipment and software fell 1.3%, after a disappointing 0.4% gain in the second quarter that economists blamed on fears of a post-election impasse in Washington over tax and spending policies set to take effect Jan. 1.

In a separate report released Friday, consumer sentiment rose to its highest level in five years in October. The monthly Thomson Reuters/University of Michigan's survey of consumers showed consumers feel more upbeat about prospects for the economy and their own finances.

The overall index on consumer sentiment rose to 82.6 from 78.3 in September, the highest level since September 2007. However, the number was revised downward from a preliminary reading of 83.1 and just short of economists' expectations for 83.

And the survey showed that consumers remain concerned about whether Washington can avert before year's end mandated spending cuts and tax increases that many believe would severely impact economic growth.

It's already affecting growth, Naroff says, pointing out businesses are delaying purchases of buildings, equipment and technology over uncertainty about whether the federal debt ceiling will be raised and which combination of austerity measures Washington ends up choosing.

"If there was a normal investment number, the economy would be growing 2.5% and no one would be complaining,'' Naroff said. "It's an example of how Washington not only doesn't create jobs, but sometimes destroys jobs by being dumb.''

Government spending rose 3.7%, the biggest increase since mid-2009, mostly due to higher defense spending.

A measure of inflation included in third-quarter GDP rose at surprising 1.8% annual rate overall, and 1.3% excluding energy and food prices.

The next major sign of the economy's health will be the Nov. 2 report on unemployment and job growth during October. The September report showed the unemployment rate dropping 0.3 percentage points to 7.8%.

One of the two surveys the Labor Department conducts to calculate the employment situation showed far more job creation than the other did.

The gap and the unexpected decline in the monthly number sparked speculation that the unemployment rate was being manipulated ahead of the closely contested presidential election. The allegations were quickly denied by Labor Department statisticians and debunked by outside economists.