U.S. third-quarter GDP up 2.5 percent

The 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 through year's end.

The expansion was a welcome relief for an economy that looked on the brink of a recession just weeks ago. Analysts still worry about 2012, however.

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 levels.

While the growth pace matched 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 Manhattan.

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. Consumers had to dip into savings to lift their spending.

"I don't know anybody who's better off now than he was a year ago," said Jose Lopez, a 67-year-old unemployed construction engineer from Miami.

A jump in gasoline prices had weighed on consumer spending earlier this year, and supply disruptions from Japan's earthquake in March curbed auto production. As those factors faded, the U.S. economy perked up.

Consumer spending grew at a 2.4 percent annual rate in the third quarter, the strongest since the fourth quarter of 2010, while business investment spending shot up at a 16.3 percent annual clip, the most in more than a year.