Economic Growth Strongest Since 1984
By Tim Ahmann
story.news.yahoo.com
WASHINGTON (Reuters) - The U.S. economy rocketed ahead at its fastest pace in more than 19 years in the third quarter of 2003 as consumers, their wallets fattened by tax cuts, went on a buying spree, an unexpectedly strong government report showed U.S. gross domestic product surged at a 7.2 percent annual rate in the July-September period, the Commerce Department said. It was the steepest climb since the first quarter of 1984 and more than double the second quarter's 3.3 percent rate.
The increase, which also reflected a big gain in business capital spending, outstripped forecasts on Wall Street, where most economists had looked for a rise closer to 6 percent.
Stocks looked set to open higher on the report while bonds sold off, with investors guessing the GDP data would bring nearer the day the Federal Reserve would raise U.S. interest rates from current bargain-basement levels.
"This is a great report for the economy," said Cary Leahey, senior U.S. economist at Deutsche Bank Securities. "Not only was the headline strong, but the mix was good and it implied a good fourth quarter."
Consumer spending gained at a hefty 6.6 percent pace as lower tax withholding on paychecks and child tax credit checks put more cash in shoppers' hands. It was the biggest increase in consumer outlays since early 1988 and accounted for nearly two-thirds of GDP growth.
U.S. Treasury Secretary John Snow welcomed the strong GDP report, though he noted the jobs market needed improvement.
"The GDP report is certainly very encouraging news for our economy, but still have more work to do to ensure that every American who wants a job can find a job," he said in a statement.
Even as the recovery quickened in the third quarter, a net 41,000 non-farm jobs were lost, bringing the number of job losses since President Bush (news - web sites) took office to 2.6 million.
The Bush administration has been happy to trumpet the impact its recent tax cuts have had in spurring a recovery, but has vowed not to rest until the jobs market catches up.
Congress passed a $350 billion White House tax plan in the spring that lowered tax-withholding rates in July and pumped out about $13.7 billion dollars in child tax credit checks in July and August.
SOLID GROWTH AHEAD?
Two other reports on Thursday also suggested a firmer recovery was taking root as new claims for jobless benefits remained at levels suggesting some stability in the labor market, and companies spent more on wages and benefits.
Most economists expect growth to cool but come in around a solid 4 percent in the final quarter of the year and through 2004, expectations buttressed by the GDP report.
But some have expressed lingering concerns that growth could falter as the tax-cut impact fades, particularly if jobs growth does not pick up soon.
Business spending rose 11.1 percent in the third quarter, the steepest climb since the first quarter of 2000 and the second straight quarterly advance.
Cuts in capital spending had long been the missing link for a more broad-based recovery as firms showed a reluctance to commit to long-term spending plans. Economists, and officials at the Federal Reserve, have said a pickup in capital spending was crucial to ensure a sustainable recovery.
The third quarter's increase in business investment reflected a sharp pick-up in spending on equipment and software, which rose at a 15.4 percent annual pace.
A shrinking in the U.S. trade deficit on the back of strong export growth also helped the economy. And it ensured sales of U.S.-made goods and services rose 7.8 percent, the strongest performance in over 25 years.
Spending on housing surged 20.4 percent, the largest gain in over seven years, contributing almost a percentage point to growth.
Government spending was also up, even though defense spending was flat after giving a big boost to growth in the second quarter.
Businesses, meanwhile, appeared to be caught flat-footed by the strength of consumer spending, with inventories of unsold goods falling $35.8 billion. Many economists expect businesses to begin building inventories soon, which would help growth.
The report also offered a sign inflation was starting to move up after a sharp slowdown earlier this year that fueled worry over the possibility of deflation. The price index for consumer spending, excluding volatile food and energy costs, rose at a 1.8 percent annual rate, a big step up from the 0.8 percent gain in the first three months of the year.
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