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U.S. economy finally back to pre-recession level

U.S. economy posts 2.5 percent increase for third quarter, up from 1.3 percent in second. Biggest challenge for U.S. economy: jobs.

By Lucia MutikaniReuters / October 29, 2011

Unidentified shoppers unload their shopping cart at a Pembroke Pines, Fla., Costco store last month. Consumers boosted their spending in September at three times the pace of the previous month, providing a larger than expected boost to growth in the U.S. economy in the third quarter.

J Pat Carter/AP/File

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WASHINGTON

The U.S. economy grew at its fastest pace in a year in the third quarter as consumers and businesses stepped up spending, creating momentum that could
carry into the final three months of the year.

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The expansion was a welcome relief for an economy that looked on the brink of recession just weeks ago, although part of the pick-up came from a reversal of factors that held back growth earlier in the year, and analysts worry about 2012.

U.S. gross domestic product grew at a 2.5 percent annual rate in the third quarter, up from a 1.3 percent pace in the prior three months, the Commerce Department said Thursday. That took output back to pre-recession level.

While the growth pace matched economists' forecasts, domestic demand showed a bit more vigor than most had expected.

``The economy is now heading in the right direction and this is very encouraging, particularly given the heightened global uncertainties and the fact that other major economies appear to be heading into recessions,'' said Millan Mulraine, a senior macro strategist at TD Securities in New York.

An agreement by European leaders to ramp up their debt crisis response combined with the data to spark a rally on Wall Street. U.S. stocks closed more than 3 percent higher.

Prices for Treasury debt fell, with benchmark yields rising to a 2-1/2-month high. The dollar recorded its biggest one-day fall against a basket of currencies in 2-1/2 years.

The GDP report could give some breathing space for Federal Reserve policymakers who meet next week to debate additional ways to help the economy and lower an unemployment rate that has been stubbornly stuck above 9 percent for five months.

The economy needs to grow at a rate of more than 2.5 percent over a sustained period to cut the jobless rate.

``The persistence of high unemployment and ongoing fragility of the economy ... will prompt the Fed to take more unconventional actions as we move into 2012,'' said Diane Swonk, chief economist at Mesirow Financial in Chicago.

For the U.S. economy, the biggest problem is the weakness of the labor market. Inflation-adjusted disposable income fell at a rate of 1.7 percent in the third quarter -- the first decline since the fourth quarter of 2009 -- and consumers had to dip into savings to lift their spending.

``People are not doing well. I don't know anybody who's better off now than he was a year ago,'' said Jose Lopez, a 67-year-old Miami construction engineer who lost his job early this month. ``It's just the bare basics,'' he said as he emerged from a discount shopping store in West Miami.

A jump in gasoline prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan's big earthquake and tsunami in March had curbed auto production.

As those factors faded, the U.S. economy perked up.