Consumer spending leads way to first quarter of growth in a year By Rex Nutting, MarketWatch WASHINGTON (MarketWatch) - The U.S. economy grew at the fastest pace in two years during the third quarter, but the revised annual growth rate of 2.2% was much slower than initially reported, the Commerce Department estimated Tuesday. U.S. real gross domestic product increased for the first time since the spring of 2008, boosted by higher consumer spending (especially on autos), a rebound in investments in homes, a slower pace of inventory reduction, more exports, and robust government spending, the government said. Before growing in the June-to-September quarter, the U.S. economy had shrunk for four straight quarters for the first time since the Great Depression. The economy had contracted 0.7% in the second quarter after plunging 6.4% in the first quarter and 5.4% in the fourth quarter of 2008. The figures are seasonally adjusted and adjusted for price changes. Real GDP has fallen 2.6% in the past year. Most economists believe the worst recession in generations ended during the third quarter, even as unemployment rose. Production and sales increased, while real incomes slipped lower. Consumer spending, boosted by the government's cash-for-clunkers program, was the main engine of growth in the third quarter. Home building contributed to growth for the first time in nearly four years. Business investment declined as a small increase in capital spending on equipment and software was overwhelmed by another large drop in investments in structures. Foreign trade subtracted from growth in the quarter. A big jump in exports was offset by an even larger rise in imports. Third-quarter GDP was originally estimated two months ago at 3.5% annualized and was revised down to 2.8% in last month's estimate. The revisions come from more complete data than was available at the first and second estimates. The 2.2% revised growth rate is the strongest since the third quarter of 2007, just before the recession began. Economists surveyed by MarketWatch were expecting only a minor revision to 2.7% in the third estimate. Economists are forecasting stronger growth of about 4% annualized in the fourth quarter, which ends Dec. 31. They see growth of about 3% annualized in the first half of 2010. The revisions to third-quarter GDP were in three major areas: Business investment, consumer spending, and inventories. Final sales increased at a 1.5% annual pace, revised from 2.5%. Gross domestic purchases - sales to U.S. residents - rose at 3% annual rate, revised down from 4%. Corporate profits increased $132.4 billion, or a 10.8% quarterly rate, in the third quarter. Profits at domestic financial corporations increased $82.8 billion, while domestic nonfinancial profits increased $27.6 billion. Profits from foreign sources rose $22 billion. Net cash flow increased $28.4 billion.

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