By Timothy R. Homan Nov. 24 (Bloomberg) -- The U.S. economy expanded at a 2.8 percent annual rate in the third quarter, less than the government reported last month, reflecting a smaller gain in consumer spending and a bigger trade deficit. The increase in gross domestic product from July through September reported today by the Commerce Department in Washington compares with a 3.5 percent gain previously estimated. Corporate profits climbed by the most in five years. Smaller increases in spending show the U.S. was dependent on government stimulus programs to help dig the world’s largest economy out of its worst recession since the 1930s. Growing profits lifted purchases of equipment and software, indicating investment by companies such as Verizon Communications Inc. will help make up for smaller gains in household purchases as unemployment mounts. “Over the next couple of quarters, it won’t be the consumer that will be driving GDP higher, it’ll be corporate spending,” John Ryding, chief economist at RDQ Economics in New York, said in an interview on Bloomberg Radio. “Consumer spending will not come back in earnest until we start creating jobs and income.” Stock-index futures trimmed gains after personal consumption trailed economists’ estimates. Futures on the Standard & Poor’s 500 Index added 0.2 percent to 1,106.0 at 9:27 a.m. in New York after climbing as much as 0.3 percent. The pace of growth matched the median forecast of 78 economists in a Bloomberg survey. Estimates ranged from gains of 2.4 percent to 3.5 percent. Consumer Spending Consumer spending, which accounts for about 70 percent of the economy, rose at a 2.9 percent pace, compared with the 3.2 percent rate forecast by economists and a 0.9 percent decline in the prior quarter. Spending added 2.1 percentage points to GDP. Home prices in 20 U.S. cities rose for a fourth straight month in September, underscoring the improvement in real estate that’s helping the economy grow, a private report showed today. The S&P/Case-Shiller home-price index increased 0.27 percent from the prior month on a seasonally adjusted basis, after a 1.13 percent rise in August, the group said today in New York. The gauge fell 9.36 percent from September 2008, more than forecast and the smallest year-over-year decline since the end of 2007. The GDP report is the second for the quarter and will be revised in December as more information becomes available. The economy shrank 3.8 percent in the 12 months to June, the worst performance in seven decades. The four consecutive decreases through the second quarter marks the longest stretch of declines since quarterly records began in 1947. Policy Support “The recovery did not begin as strongly as first thought,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “The evidence is still positive and continues to point to a nascent recovery, but the feeble strength of spending in the recovery clearly suggests that strong policy support will be needed for some period of time.” Much of the boost last quarter was provided by the administration’s auto-incentive program known as “cash for clunkers,” which offered buyers payments of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan, which ended in August, boosted sales by about 700,000 vehicles, according to the Transportation Department. Third-quarter corporate profits, reported for the first time today, increased 11 percent, the biggest gain since the first three months of 2004. Productivity Gains Productivity gains are boosting company earnings as payrolls are reduced. Labor costs fell at a 5.2 percent rate last quarter, capping the biggest 12-month drop since records began in 1948, Labor Department figures showed earlier this month. Productivity, a measure of employee output per hour, surged 9.5 percent in the third quarter, the fastest pace in six years. The economy has lost 7.3 million jobs since the recession began in December 2007. Payroll cuts peaked at 741,000 in January. The economy lost 190,000 jobs in October. The unemployment rate last month reached a 26-year high of 10.2 percent, up from 7.6 percent from when President Barack Obama took office in January. Economists surveyed by Bloomberg this month forecast the jobless rate will remain above 10 percent through the first half of next year. Inflation Gauge The Fed’s preferred inflation gauge, increased less than forecast. The measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual pace following a 2 percent increase in the prior quarter. Trade subtracted 0.8 percentage point from third-quarter GDP. The gap between exports and imports climbed to $358 billion at an annual pace. Today’s report showed purchases of equipment and software increased at a 2.3 percent pace, more than the Commerce Department estimated last month. Verizon, the second-largest U.S. phone company, has committed to spending $23 billion through next year on high- definition television and Web service. The New York-based company last month reported third-quarter profits that topped analysts’ estimates. Leaner Inventories Inventories dropped at a $133.4 billion annual pace, more than first estimated. The decrease was still smaller than the record $160.2 billion decrease in the second quarter. Leaner stockpiles set the stage for recovery in production. The improving economy, cost-cutting and higher productivity have helped companies from Saks Inc. to Campbell Soup Co. turn a profit. The world’s largest soup-maker said yesterday that first-quarter profit climbed 17 percent. “Increased productivity in our supply chain” contributed to profits, Douglas R. Conant, president and chief executive officer of Campbell, said in a statement. The economy will likely expand at a 3 percent annual rate from October through December, the median forecast in a survey earlier this month showed. GDP will grow 2.6 percent next year and 3 percent in 2011, the survey showed, compared with an average of 3.4 percent growth over the past six decades. To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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