Third-quarter GDP growth rate slower than expected

Carlos Torres

Friday, Oct. 29, 2004 | 9:24 a.m.

The U.S. economy grew at a slower-than-expected 3.7 percent annual rate in the third quarter, held back by a record trade deficit and slowdown in inventory building, a government report showed.

The rise follows a 3.3 percent rate of expansion in the second quarter, the Commerce Department said in Washington. Consumer spending, which accounts for more than two-thirds of the economy, rose at a 4.6 percent pace, almost three times as fast as in the second quarter. Business investment grew, and one measure of inflation dropped to a four-decade low.

"This may be the peak for a while, but it's a very solid report," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. Naroff, the most accurate forecaster of GDP in surveys by Bloomberg News, predicts the economy will grow 3.1 percent this quarter.

The price of oil, which contributed to the trade gap, surpassed $50 a barrel Oct. 1 and has since moved higher, which may make consumers and businesses hesitant to spend. Growth in personal income slowed in the third quarter, today's report said, and that may limit the expansion as well.

Democratic challenger John Kerry's campaign said the trade deficit underscores that President Bush's policies aren't creating enough jobs. Bush may point to increased consumer and business spending as well as subdued inflation. The report gives the broadest look at the economy before Election Day next week.

Economists expected a 4.3 percent gain in GDP last quarter, according to the median of 80 forecasts in a Bloomberg News survey.

GDP, or the volume of all goods and services produced by the economy, the world's largest, rose to $10.9 trillion after adjusting for inflation. Before inflation, GDP rose at a 5.1 percent annual pace to $11.8 trillion. The economy expanded 3.9 percent during the 12 months that ended in September.

A rise in energy prices may increase consumers' fuel bills by $60 billion and may subtract as much as 0.9 percentage point from fourth-quarter growth, according to an Oct. 22 research report by economists at Citigroup Global Markets Inc. in New York. They project the economy will grow 3.1 percent in the last three months of the year.

A measure of prices tied to the report rose at a 1.3 percent annual rate, after gaining 3.2 percent in the second quarter. The prices of goods and services bought by consumers rose at a 1.1 percent annual pace and were up 0.7 percent when food and energy costs were excluded. That gain was the smallest since the fourth quarter of 1962.

Inflation gauges are likely to rebound this quarter as oil and other forms of energy rise. The surge held back consumer and business spending and constrained economic growth heading into the fourth quarter, according to the Federal Reserve's "beige book" report card on regional economies issued two days ago.

Fed policy makers will use the report to help them set interest rate policy at their next meeting Nov. 10. All 22 banks that deal directly with the Fed expect the central bank will increase the target rate for overnight loans between banks by 25 basis points, to 2 percent from 1.75 percent, according to a survey this week by Bloomberg News.

The prospect of slower growth makes future rate increases less certain. The Fed will probably not raise the rate at the last meeting of the year on Dec. 14, according to 16 of the 22 banks.