Oct 26, 2012 3 min read

The U.S. economy grew at an annual rate of 2 percent in the third quarter, slightly better than expected, with help from a healthier housing sector and a pickup in defense spending. But economists warn growth could slow in the final quarter of the year if weakness in exports persists and businesses remain cautious because of fiscal uncertainty in Washington. The new figure, released by the Commerce Department Friday, is the government’s first estimate of growth in the third quarter. It compares with the 1.3 percent pace of growth in the second quarter. In the first quarter of 2012, the economy also grew by 2 percent. Consumer spending rose at a seasonally adjusted annual rate of 2 percent, compared with 1.5 percent in the second quarter. Residential investment increased at an annual rate of 14.4 percent in the third quarter, versus 8.5 percent in the second quarter, a positive sign for the housing sector. “All in, (Friday’s) report showed somewhat faster domestic demand driven by the household sector,” said Maury Harris, chief economist at UBS Securities. The report comes amid fears companies are clamping down on spending in the face of potential tax increases and spending cuts in the United States, a recession in parts of Europe and a deceleration in demand from China. Friday’s report, for example, showed exports decreased by 1.6 percent in the latest quarter, compared with a 5.3 percent increase in the second quarter. It was the first time exports had fallen since the first quarter of 2009. But the nascent recovery in the housing market and a slight drop in the unemployment rate are translating into more consumer optimism. A survey released Friday showed consumer sentiment at its highest level in more than five years, with the Thomson Reuters/University of Michigan index rising to 82.6 in October from 78.3 in September, though it was lower than a preliminary October reading of 83.1 reported earlier. Nigel Gault, chief U.S. economist for IHS Global Insight, added while the uncertainty hanging over businesses did not seem to be affecting consumers, that could change if Washington did not avert a wave of tax increases and automatic spending cuts set to go into effect early next year. Among the biggest factors in the uptick of growth in the gross domestic product was a 13 percent jump in defense spending. On the other hand, a drop in farm inventories – fallout from the severe drought this summer – shaved 0.4 percent off overall growth.