Economy grows at 4 percent rate — faster than expected

Jeannine Aversa

Wednesday, Dec. 22, 2004 | 9:15 a.m.

WASHINGTON -- The economy revved up its engine in the third quarter and advanced at an annual rate of 4 percent -- even faster than previously thought.

The new reading on gross domestic product, released today by the Commerce Department, exceeded the previous estimate of a 3.9 percent growth rate for the July-to-September quarter. It marked the best showing since the opening quarter of this year and was up from a 3.3 percent pace in the second quarter.

"This signals that we brought some nice momentum into the fourth quarter," said Carl Tannenbaum, chief economist at LaSalle Bank.

Gross domestic product measures the value of all goods and services produced in the United States and is the broadest barometer of the country's economic health.

Brisk spending by consumers and businesses helped the economy expand nicely in the third quarter. The slight upward revision to GDP in the third quarter mostly reflected the fact that the trade deficit was less of a drag on the economy than previously estimated.

The new GDP figure, based on more data, was better than economists were forecasting. They were predicting economic growth would remain at the 3.9 percent pace estimated a month ago.

After adjusting for inflation, the economy grew to $10.9 trillion, on an annualized basis, in the third quarter. That represented an increase of $106.3 billion from the previous quarter.

The latest snapshot of the economy comes as President Bush lays the groundwork for his second-term economic agenda. The centerpieces are overhauling Social Security and the nation's tax system -- tall orders from both an economic and political standpoint, analysts say.

Looking ahead to the current October-to-December quarter, analysts believe the economy will perform solidly. Estimates for fourth-quarter growth range from a 3.5 percent rate to a 4.5 percent rate.

Economists on the lower end of the scale believe high energy prices will make consumers more moderate spenders in the final quarter of the year, compared with the robust buying they did in the third quarter.

Crude oil prices hit a record high of just over $55 a barrel in late October. Prices are now hovering around $45 a barrel.

In the third quarter, consumers ratcheted up spending at a 5.1 percent rate, the fastest pace since the end of 2001. Consumer spending accounts for roughly two-thirds of all economic activity. Thus their behavior is an important factor in determining the strength of the economy.

Businesses, meanwhile, boosted their investment in equipment and software at a sizable 17.5 percent pace -- slightly better than previously thought -- and the fastest pace since the third quarter of 2003.

The trade deficit in the third quarter ended up shaving a tiny 0.10 percentage point from GDP, an improvement from the 0.27 percentage-point reduction previously estimated for the quarter.

Encouraged by the economy's performance, Federal Reserve policy-makers, earlier this month, boosted short-term interest rates by one-quarter percentage point to 2.25 percent, the fifth rate increase this year. The Fed meets next in early February, and economists think rates probably will go up again then.

While the economic recovery has been moving along solidly, the labor market recovery has been somewhat uneven. Employers, keeping a close eye on their bottom lines, added 112,000 jobs in November, down from 303,000 in October.

One measure of after-tax profits in the GDP report showed profits shrank by 4.2 percent in the third quarter from the previous quarter. Analysts say profits were restrained by a string of hurricanes that ripped through the Southeast, high energy prices and slower productivity growth. But profits are up 5.7 percent from the third quarter a year ago.

In a separate report, industrial production in November grew by 0.2 percent, down slightly from a 0.3 percent increase initially reported, according to revised figures released by the Federal Reserve.

The revisions also showed that industrial output was flat in 2003, compared with a 0.2 percent rise previously reported. Industrial production dipped by 0.3 percent in 2002, half as deep as previously estimated. Output in 2001 -- the year the economy went into and emerged from recession -- fell by 3.6 percent, a larger decline than the old figure showed. Revisions, which are made each year, are based on more information.