(Bloomberg News) The U.S. economy grew in the third quarter at the fastest pace in a year as Americans reduced savings to boost purchases and companies stepped up investment in equipment and software.

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

The biggest drop in incomes in two years, along with declines in home prices and consumer confidence, cast doubt on whether the increase in spending can be sustained. Federal Reserve policy makers, who meet next week, and the Obama administration are considering additional measures to reduce an unemployment rate that has been stuck around 9 percent or higher for 30 months.

"There is some gain in momentum after a very weak first half," said Robert Dye, chief economist at Comerica Inc. in Dallas, who correctly forecast the rise in GDP. "We need to get the jobs machine going and get the housing market moving in the right direction. The economy remains in a low-to-moderate growth mode, and that keeps us vulnerable."

Stocks surged as European leaders agreed to expand a bailout fund to stem the region's debt crisis. The Standard & Poor's 500 Index climbed 2.5 percent to 1,272.6 at 9:38 a.m. in New York, extending its October advance to more than 12 percent and erasing its 2011 loss. Treasuries fell, pushing the yield on the 10-year note up to 2.29 percent from 2.21 percent late yesterday.

An agreement by European leaders on steps that included recapitalizing the continent's banks brought them closer to a resolution of the sovereign-debt crisis that Fed policy makers have identified as a risk to the U.S. economy.

Other data today showed that consumer confidence declined last week as Americans' views of the economy sank to the lowest since the recession, and the number of contracts to purchase previously owned U.S. homes unexpectedly fell in September.

The Bloomberg Consumer Comfort Index dropped to minus 51.1 in the week ended Oct. 23, the lowest in a month, from minus 48.4 the prior period. Ninety-five percent of those surveyed had a negative opinion about the economy, the worst since April 2009 and one percentage point shy of a record high.

The National Association of Realtors said its index of pending home sales fell 4.6 percent, the biggest decline since April. Economists forecast a 0.4 percent gain, according to the median of 38 estimates in a Bloomberg News survey.

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

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