U.S. economy growing faster than forecast

(MoneyWatch) The U.S. economy got an early holiday gift Thursday when the U.S. Commerce Department announced that growth in the third quarter was 2.7 percent, topping a previous forecast.

While the latest economic snapshot is good news for Americans, it raises the heat on Congress and President Barack Obama to reach a deal to avoid taking the nation off the so-called "fiscal cliff," a package of mandated government spending cuts and expiring tax breaks scheduled to take effect in January. That could throw the economy in reverse just as it appears to be gaining speed.

The new GDP figures are an update of the agency's estimate last month of 2 percent growth in the July-to-September period. The revised numbers, which are adjusted seasonally, offer a more accurate picture of growth than the government's initial forecast. The economy grew 1.9 percent and 1.3 percent, respectively, in the first and second quarters.

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Propelling the growth in GDP was stronger consumer spending, federal outlays, expanding business inventories and a renewed housing sector, the Commerce Department said.

Yet the latest report also suggests the economy may be slowing slightly in the fourth quarter. Drags on growth include exports, which slid 1.6 percent for the quarter, compared with a 5.3 percent rise in the previous quarter, and shrinking investment in non-residential real estate. Gains in household income also fell, which could reduce consumer spending in future months.

Much of the growth for the quarter, at 0.8 percent, came from businesses building up inventories. Because they may not need to re-stock in the current quarter, that could effectively steal growth from the last three months of the year. "The bigger the build-up in the third quarter, the more likely we are to see a run down in the fourth," said Paul Ashworth, chief U.S. economist with Capital Economics, in a research note.

Another 0.7 percent of GDP growth stemmed from increased federal spending, mostly for defense. The government is likely to curb such spending in the current quarter, which also could reduce growth.

Perhaps most critically for the recovery, housing around the U.S. continues to show steady, if unexceptional, gains. For the third quarter, home prices around the nation were up 3.6 percent from the year ago-period, according to the Case-Shiller index, and sales of existing houses have grown roughly 10 percent from a year ago. Driving that rebound: Low mortgage rates, which are luring home buyers back into the market and a declining stock of new and existing homes.

Rising real estate prices allow homeowners who owe more on their mortgages than their properties are worth to recoup equity. In shedding debt and recovering some of the wealth that vaporized during the housing crash, people are freer to spend, which fuels broader economic expansion.

On the supply side, rising housing values and sales give homebuilders an incentive to put up new homes. As a result, construction expanded across most of the Federal Reserve's 12 districts, the central bank said Wednesday, with new starts roughly 40 percent above year-ago levels.

For now, that momentum looks likely to continue. A growing number of Americans plan to buy a home within the next six months, according to the Conference Board, a trade association representing businesses. Patrick Newport, U.S. economist with IHS Global Insight, also said in a report this week that the research firm expects home prices to continue rising over the next five years, although not much faster than inflation.

The other major engine for the economy this year has been consumer spending. That fell slightly in the quarter, to 1.4 percent, down from 2 percent in the previous estimate, Commerce reported. Yet many economists expect that to rebound next year. One good sign is that the key holiday shopping season is off to a good start, fueled by strong Black Friday sales, and expectations for the final month of the year are generally upbeat.

Consumer spending accounts for roughly 70 percent of economic activity. As Americans have continued to spend, even amid mounting public attention on the fiscal cliff, more businesses have started hiring.

The number of Americans applying for jobless benefits fell 23,000 last week to 393,000, the U.S. Labor Department said today. The labor market has strengthened in recent months, with the government revising upward previous job-creation estimates. Unemployment fell last month in more than half of the 372 biggest U.S. cities, according to the government.

Despite these tailwinds, job-creation remains too weak to significantly reduce the nation's 7.9 percent unemployment rate. Hiring has shown only modest improvement in recent weeks, according to the Fed. Meanwhile, much of that job growth has been for temporary and part-time workers, while the long-term unemployed still struggle to find work. Unemployment is expected to remain well above 7 percent through the end of 2013, according to research firm Macroeconomic Advisers.

In the short term, much depends on how -- and when -- the impasse over the fiscal cliff is resolved.

The Congressional Budget Office forecasts that implementing all the planned government spending cuts and tax hikes would reduce real GDP by 0.5 percent in 2013. That would dent spending and push up the jobless rate. But with the automatic cuts phased in over 10 years and tax increases initially taking a relatively small bite out of people's income, the damage could be limited if lawmakers reach a deal early next year.

Editor's note: CBS MoneyWatch initially published an Associated Press story on the GDP report, which we have since replaced with this staff-written article. You can find the initial AP report and reader comments here.