U.S. Economy: Third-Quarter Growth Rose at 3.8% Rate (Update2) Listen
Oct. 28 (Bloomberg) -- U.S. economic growth quickened to a 3.8 percent annual rate in the third quarter, as the economy overcame higher energy costs and Hurricane Katrina.
The Commerce Department's first estimate of gross domestic product for the quarter, released today in Washington, exceeded the median forecast and compares with a 3.3 percent pace from April through June. A measure of inflation watched by the Federal Reserve rose at the slowest pace since the second quarter of 2003.
Companies pared inventories for a second quarter, setting the stage for stronger production that will help fuel the economy even as consumer spending is held back by higher heating bills and waning confidence, economists said. Wage gains over the last 12 months were the smallest since 1981, a separate report showed.
``Even if consumers pull back a bit, just rebuilding those inventories will add a lot of growth,'' said David Kelly, adviser to Putnam Investment in Boston, in an interview from Boston. Putnam had $192 billion in assets under management as of Sept. 30. ``We will see a shift to business spending from consumer spending in the fourth quarter, and when that occurs, it will be quite healthy.''
Stocks rose after the GDP figure, which exceeded the 3.6 percent median estimate of 67 economists surveyed by Bloomberg News. Estimates ranged from 2.7 percent to 5.1 percent. The Standard and Poor's 500 Index rose 11.3, or 1 percent, at 12:29 p.m. in New York.
``These are very strong numbers,'' said Phil Flynn, vice president of risk management at Alaron Trading Corp. in Chicago in an interview. ``This is very good for the stock market. We saw it rally. It looks like it will continue to do so.''
Wages
Wages increased 2.3 percent in the third quarter from the same three months last year, the smallest year-over-year rise since record-keeping began in 1981, the Labor Department said separately. Total U.S. labor costs rose 0.8 percent in the third quarter after a 0.7 percent rise in the previous three months.
``We do think you're going to see a drop off in consumer spending in coming months,'' said John Shin, an economist at Lehman Brothers Inc. in New York. Lehman economists correctly predicted third-quarter growth. ``Part of the reason is workers are experiencing pain in their take-home pay. You're still seeing other areas of the economy kicking in. These will offset some of the negatives from lower consumer spending.''
Consumer confidence fell this month to the lowest level in 13 years because of energy costs. The University of Michigan said today that its index of sentiment declined to 74.2 from September's 76.9. The reading was lower than the preliminary estimate of 75.4.
Other Nations
Growth in the U.S. economy has exceeded 3 percent for 10 straight quarters, the longest string since the 13 three-month periods that ended in March 1986 and the best performance among nations in the Group of Seven industrialized nations, which includes the U.S., Japan, Germany, the U.K., France, Canada and Italy.
The U.S. economy grew 3.6 percent in the 12 months ended in September. By comparison, only the economies of Japan and Canada exceeded 2 percent growth during the 12 months ended in June, according to the latest available data.
``There is little wonder why the American economy is the envy of the world,'' U.S. Treasury Secretary John Snow said in a statement. ``There can be no doubt that the American economy is an adaptive and resilient marvel.''
The government's personal consumption expenditures index, a measure of prices tied to consumer spending, rose 3.7 percent after a 3.3 percent rise in the second quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 1.3 percent annual rate, the slowest since a 1 percent pace in the second quarter of 2003.
Federal Reserve
``The Fed is seeing strong energy inflation and job gains, and the question is whether those start to hit core consumer prices,'' said Tim Rogers, chief economist at Briefing.com in Boston. ``To date, core inflation has been growing at a fairly tame rate. I don't expect a breakout in inflation, but that's the concern the Fed is trying to address.''
The Fed must raise rates enough to keep inflation expectations well-contained, William Poole, president of the St. Louis Fed, said after an Oct. 20 speech. The Fed boosted its main interest rate for an 11th time on Sept. 20, by a quarter percentage point to 3.75 percent, and is forecast to raise it to 4 percent at their meeting Nov. 1.
The GDP price index, a measure of prices tied to the report rose at a 3.1 percent annual rate, following a 2.6 percent second- quarter gain.
`Very Strong'
``We see no reason for the Fed to change its monetary strategy'' or the language in its statement next week, John Ryding, chief U.S. economist at Bear, Stearns & Co. in New York, wrote in a note to clients. Low core PCE inflation and the faster GDP growth will encourage policy makers to keep saying in their statement that rates can rise at a ``measured'' pace and that their rate strategy is ``accommodative,'' Ryding said.
The value of all goods and services produced by the economy, the world's largest, rose to $11.2 trillion after adjusting for inflation. Unadjusted for price changes, GDP rose at a 7 percent annual pace to $12.6 trillion.
``What we see is that the economy still looks very strong,'' said Michael Ward, chief executive officer at No. 3 U.S. railroad CSX Corp., in an Oct. 26 interview. CSX is based in Jacksonville, Florida.
Consumer spending rose 3.9 percent at an annual rate last quarter, the most this year, compared with a 3.4 percent pace in the previous three months. The average quarterly increase over the last 20 years before today's report was 3.4 percent.
Inventories
Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 6.2 percent annual rate in the third quarter, after rising at an 8.8 percent rate from April through June. Spending on new equipment and software increased 8.9 percent.
Companies reduced stockpiles at a $16.6 billion annual rate last quarter after reducing inventories at a $1.7 billion pace in the second three months of the year. The reduction, the largest since $86.7 billion in the fourth quarter of 2001, subtracted 0.55 percentage points from GDP.
The trade deficit narrowed to $611.8 billion from $614.2 billion in the second quarter. That added 0.08 percentage point to GDP after adding 1.1 percentage points in the prior three months, marking the first time trade has added to growth in consecutive quarters since the last half of 1995.
Residential housing construction rose at a 4.8 percent annual rate last quarter, the smallest this year, after a 10.8 percent gain the previous three months.
Government spending rose last quarter at a 3.2 percent annual rate, the most since the first quarter of 2004, following a 2.5 percent second-quarter increase.
Energy Costs
Hurricane Katrina struck the Gulf Coast on Aug. 29, damaging businesses and hindering oil and gas production. The retail price of gallon of regular unleaded gasoline reached $3.069 the week ended Sept. 5, according to figures from the Energy Department.
Lehman Brothers economists estimated that higher energy costs and lower employment associated with the storm shaved about 0.7 percentage point from growth during the quarter. While Commerce made no such estimate, it did say personal incomes were reduced by $40 billion, reflecting reductions to rental and proprietors' income.
Autos sold at the second-fastest pace on record in July after Ford Motor Co. and DaimlerChrysler AG's Chrysler unit matched General Motors Corp.'s offer to extend employee discounts to all buyers. Spending by consumers on motor vehicles added 0.62 percentage point to third-quarter growth, the most since the third quarter of 2003. Vehicle purchases slumped in August and September, industry figures showed.
Holiday Sales
Economists said consumer demand that has powered the economic expansion may flag in coming months as heating bills overwhelm gains in income. Homeowners will see heating bills jump as much as $500 this winter as fuel oil and natural gas prices rise, the Energy Department said earlier this month.
Holiday retail sales are expected to increase 5 percent from a year earlier, the smallest gain since 2002, according to a forecast by the National Retail Federation. Wal-Mart Stores Chief Executive H. Lee Scott said last month that higher gas prices may crimp spending, particularly on nonessential items.
Spending by businesses to replenish inventories, along with government efforts to rebuild the Gulf Coast, will help make up for slower consumer demand in coming months, said economists including Stephen Stanley, at RBS Greenwich Capital in Greenwich, Connecticut. |
