Slow GDP Growth Sets Stage for Fed's Next Round of Quantitative Easing

The U.S. economy continued to struggle to grow in the third quarter, most likely giving government officials enough cover to pump more liquidity into the financial system to stimulate hiring.

Gross domestic product (GDP), the value of all goods and services produced, increased by 2% in the third quarter, the Commerce Department reported Friday. Economists polled by Dow Jones Newswires were expecting GDP to rise by 2.1% in the July to September period, The Wall Street Journal reported.

The gain was slightly more than the second quarter's 1.7% growth but not enough to revive a moribund job market, according to most economists.

The report was the final important economic indicator the government will release before midterm elections tomorrow and the next meeting of the Federal Reserve Board, which will conclude on Wednesday.

Even though the economists have said the recession ended more than a year ago, the unemployment rate remains stubbornly high at 9.6%. The sluggish economy could sweep Republicans into power in the Congressional elections and push the Fed to resume buying Treasury bonds in a renewed move towards quantitative easing.

The report also showed inflation cooled to 0.8%, well below the Federal Reserve's preferred threshold of 2%, giving policy makers room to pump more money into the world's largest economy.

The GDP report also showed that spending by Americans, accounting for about 70% of demand in the U.S. economy, rose at a 2.6% rate, the best quarter of the recovery that began in June 2009. That's up from a 2.2% increase in the April to June period and 1.9% in the first quarter

"Consumer spending is growing, business demand is still OK," Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. (NYSE: JPM) in New York, told Bloomberg News.

"We need to do better than this to get a real recovery in the labor market. The report leaves everything in place for more asset purchases by the Fed next week." said Feroli, who accurately forecast the gain in household purchases.

Fed Chairman Ben S. Bernanke announced in August the central bank "will do all that it can" to keep the economy growing. Most analysts have said they are expecting policy makers to launch another round of Treasury purchases after the bank bought $1.7 trillion in debt from December 2008 through March.

The U.S. government needs to consider selling assets to boost the economy and reduce the deficit, Mexican billionaire Carlos Slim told Bloomberg Friday.

"Most aggressive monetary and fiscal policies are not enough," Slim said at the George Washington University Global Forum in New York City. "They are temporary measures."

The gain in consumer spending, the biggest since the end of 2006, compared with a 2.5% median forecast in the Bloomberg survey of economists. Spending added 1.8 percentage points to growth.

Even though they are improving, consumer purchases remain well below levels seen following previous U.S. recessions. In the four quarters after the last deep U.S. recession in 1982, consumer spending posted increases of between 4% and 8%.

Americans' wealth and incomes were badly hit by the collapse in home prices and the extremely weak jobs market that followed the financial crisis. GDP growth in the 2.5% percent to 2.8% range is needed to generate enough jobs to meet population growth and keep the jobless rate stable, according to policy makers' forecasts.

The latest report of tepid GDP growth is causing investors to exercise caution heading into next week's midterm elections and breeding uncertainty about the size of economic stimulus measures the Federal Reserve is expected to announce next week.

Most investors expect the Fed to announce plans to buy U.S. Treasury bonds worth a few hundred billion dollars over several months to keep interest rates low in an effort to spark growth.

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