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Consumers, businesses boost US economy; 5 things we learn from GDP report

The US economy grew 2 percent in the third quarter, the Commerce Department reports. But imports limited the benefit to the GDP from increased consumer and business spending.

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Economists don’t expect the inventory accumulation to continue. “During the October-December quarter, inventories could be a significant drag on economic growth,” writes economist Sung Won Sohn of California State University, Channel Islands, in an analysis.

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Interest Rates

The GDP report is unlikely to change anyone’s mind at the Federal Reserve about whether to begin a new program of lowering longterm interest rates. On Wednesday, the Fed is expected to announce it will start to buy longterm US Treasury debt as part of the program, called quantitative easing. That effort is controversial within the Fed with some governors warning about potential inflationary consequences and others concerned about deflation or the lowering of prices if nothing is done.

“The GDP report confirms to those who believe in it that quantitative easing is needed,” says Mr. Naroff. “Whether it will have an impact is a different story.”

Economists at Wells Fargo & Co. anticipate the Fed will buy about $500 billion in securities over the next six months. “While some calculations consider up to $2 trillion of purchases, there is likely not enough consensus at the Fed for a shock-and-awe approach,” writes the bank in an analysis on Friday.

Political impact

The GDP report may also have some political ramifications. The GDP is the last significant economic report before the mid-term elections and quickly generated comment from both sides. At the White House, Austan Goolsbee, chair of the Council of Economic Advisers, highlighted that the report is the fifth straight quarter of positive economic growth. But, he added, “Given the depth and severity of the recession, considerable work remains before our economy is fully recovered.”

However, House Republican leader John Boehner blamed the slow economy on President Obama’s policies and reiterated his call to extend the Bush tax hikes for all Americans, not just the middle class.

“Either side can use the results,” says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. “The GDP is more of a good news, bad news story – the good news is the economy grew, the bad news is that it was not strong enough.”