Economy grows faster than expected in third quarter

Jeannine Aversa

Tuesday, Nov. 30, 2004 | 9:42 a.m.

WASHINGTON -- The economy -- helped out by more brisk consumer and business spending -- grew at an annual rate of 3.9 percent in the third quarter, a performance that was stronger than previously thought.

The new reading on gross domestic product, which is based on additional data, was up from the 3.7 percent growth rate first estimated for the July-to-September quarter, the Commerce Department reported today.

"I think the economy has found its groove," said Mark Zandi, chief economist at Economy.com.

GDP measures the value of all goods and services produced within the United States and is considered the broadest barometer of the economy's health.

The 3.9 percent growth rate registered in the third quarter represented a pickup from the second quarter's 3.3 percent pace and marked the best showing since the opening quarter of this year.

The latest snapshot of economic activity was brighter than economists were expecting. They were predicting economic growth would hold steady at the previously estimated pace of 3.7 percent.

The main reasons for the third-quarter improvement: stronger consumer spending, which grew at the fastest clip since the end of 2001, and more robust business investment in equipment and software. Better growth in U.S. exports also helped.

Consumers' confidence in the economy, meanwhile, sank for the fourth month in a row.

The Conference Board's Consumer Confidence Index fell to 90.5 in November, down from 92.9 in October. Analysts had forecast the index would rise to 96.0.

On Wall Street, the Dow Jones industrials were off around 26 points in morning trading.

Although the economy is expanding at a solid pace, private economists want to see continued improvements in the labor market, where the recovery has been somewhat sluggish. In October, the economy added a sizable 337,000 jobs, the most since March. While many of those jobs were for hurricane cleanup, the report still raised hopes that the job recovery might be becoming more firmly rooted.

Economists predict employers expanded payrolls by around 200,000 in November, and that the jobless rate will dip down to 5.4 percent from October's 5.5 percent. The employment report for November will be released Friday.

President Bush and Democrats have widely different views about how the economy is faring and how it should be handled going forward. Looking toward his second term, Bush says that simplifying the tax code and overhauling Social Security are two main prongs of his economic agenda.

Encouraged by the economy's performance, the Federal Reserve has raised short-term interest rates four times this year. Analysts believe another rate increase probably will come on Dec. 14, the Fed's last scheduled meeting for 2004.

Some economists believe the economy may expand at a slightly faster pace of just more than 4 percent in the current October-to-December quarter. The GDP report for the fourth quarter will be released in late January.

One of the factors analysts will be keeping a close eye on is the impact of high energy prices on economic activity. Crude oil prices hit a record high of just over $55 a barrel in late October. Prices are now hovering close to $50 a barrel.

From an economic point of view, however, inflation is still under control despite the surge in oil prices. An inflation gauge tied to the GDP report and closely watched by Fed policy-makers showed that prices -- excluding food and energy -- rose at an annual rate of just 0.7 percent in the third quarter. That was down from a 1.7 percent growth rate in the second quarter and marked the lowest reading since the final quarter of 1962.

One measure of after-tax profits contained in the GDP report showed that profits shrank by 2 percent in the third quarter from the previous quarter. Analysts said profits were restrained by a string of hurricanes that ripped through the Southeast, high energy prices and slower productivity. But profits are up by 8.1 percent from a year ago.

Consumers, the lifeblood of the economy, increased their spending in the third quarter at a 5.1 percent annual rate. That was up from a 4.6 percent rate first estimated for the quarter and marked a considerable pickup from the lackluster 1.6 percent growth rate recorded in the second quarter.

Business spending on equipment and software, meanwhile, grew at a sizable 17.2 percent annual rate in the third quarter -- better than the 14.9 percent growth rate previously estimated for the period and up from the second quarter's 14.2 percent pace.

U.S. exports -- helped out by a weaker value of the U.S. dollar -- grew at a 6.3 percent rate in the third quarter, also better than previously estimated, and helping overall economic growth for the quarter.

Overall, the economy, after adjusting for inflation, grew to $10.9 trillion, on an annualized basis, in the third quarter.