The U.S. economy grew in the third quarter at the fastest pace in a year as gains in consumer spending and business investment helped support a recovery on the brink of faltering.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, matching the median forecast of economists surveyed by Bloomberg News and up from a 1.3 percent gain in the prior quarter, Commerce Department figures showed today in Washington. Household purchases, the biggest part of the economy, increased at a more-than-projected 2.4 percent pace.

Americans last quarter cut savings to boost purchases as incomes dropped by the most in two years, calling into question the sustainability of the acceleration in sales. With the lack of jobs holding back wages, the Obama administration and Federal Reserve policy makers have proposed additional measures aimed at stimulating growth and hiring.

"While the first half numbers led many to fear something worse, we continue be in a moderate growth recovery," said Dean Maki, chief U.S. economist at Barclays Capital in New York who correctly forecast the GDP figures. "Despite the fears consumers are turning more cautious, their spending has actually slightly outpaced their income."

Stocks climbed after the report and as European leaders agreed to expand a bailout fund to $1.4 trillion in a bid to tame the region's debt crisis. The Standard & Poor's 500 Index rose 2 percent to 1,266.30 at 9:32 a.m. in New York, erasing its 2011 loss. Treasury securities fell, sending the yield on the benchmark 10-year note up to 2.29 percent from 2.21 percent late yesterday.

Jobless Claims

First-time jobless claims decreased by 2,000 to 402,000 in the week ended Oct. 22, Labor Department figures also showed today. The number of people collecting unemployment benefits fell in the prior week by 96,000 to 3.65 million, the fewest since September 2008.

GDP forecasts in the Bloomberg survey of 83 economists ranged from 1.5 percent to 3.5 percent.

The increase in consumer spending last quarter followed a 0.7 percent gain in the second quarter and exceeded the 1.9 percent median forecast in the Bloomberg survey. Purchases added 1.7 percentage points to growth.

Sales climbed at an average 2.7 percent annual rate during the expansion that ended in December 2007.

Savings Rate

The gain came at a cost as the savings rate last quarter dropped to 4.1 percent, the lowest since the last three months of 2007. After-tax incomes adjusted for inflation decreased at a 1.7 percent annual rate, the biggest drop since the third quarter of 2009.

McDonald's Corp., the world's biggest restaurant chain, is among companies trying to keep prices down to attract budget- conscious customers as unemployment saps confidence. The Oak Brook, Illinois-based company this month said third-quarter profit gained 8.6 percent.

"The environment out there is still fragile," James Skinner, McDonald's vice-chairman and chief executive officer, said in an Oct. 21 call with analysts. "Consumers everywhere continue to be cautious and hesitant to spend."

One bright spot last quarter was business investment. Corporate spending on equipment and software climbed at a 17.4 percent pace, the most in a year. It contributed 1.2 percentage point to growth.

Payroll Gains

The pickup in business investment, nonetheless, didn't translate into more jobs. Payrolls rose by an average 96,000 workers per month last quarter, down from the 166,000 average in the first three months of the year.

President Barack Obama proposed last month a $447 billion plan to stimulate jobs, which included expanding a payroll tax break due to expire at the end of this year, increasing spending on public works projects and extending jobless benefits.

Obama yesterday said he is seeking ways to take action without congressional approval after the Senate blocked the measure earlier this month. The steps include altering a program to help homeowners refinance mortgages and easing the burden of student loans.

Fed policy makers pledged in August to hold the benchmark interest rate near zero through the middle of 2013 so long as joblessness stays high and the inflation outlook is "subdued." On Sept. 21, they announced a plan to replace debt in the central bank's portfolio with longer-term Treasuries to help cut borrowing costs.

Less Inflation

Inflation decelerated in the third quarter, opening the door for the central to take action. The Fed's preferred price gauge, which strips out food and energy costs, climbed at a 2.1 percent annual pace following a 2.3 percent gain in the second quarter. The central bank's longer term projection is a range of 1.7 percent to 2 percent.

Companies also kept a tight rein on stockpiles last quarter, making it less likely that production will have to be cut back. Inventories were rebuilt at a $5.4 billion annual pace, down from the second quarter's $39.1 billion rate. The reduction subtracted 1.1 percentage points from GDP growth.

Excluding inventories, the economy grew at a 3.6 percent annual rate last quarter, up from a 1.6 percent in the April through June period.

The trade deficit shrank last quarter, contributing 0.2 points to GDP.

Government spending stagnated, continuing to restrain growth. A 2 percent gain in federal outlays was offset by a 1.3 percent drop by state and local agencies.

The U.S. economy expanded at an average 0.9 percent rate in the first half of 2011, the worst performance since the recovery began in June 2009. Growth needs to exceed 2.5 percent to reduce the jobless rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.