U.S. economy expands 7.2% in 3rd quarter

Growth in goods, services is fastest since 1984, up from 3.3% months earlier

Tax cuts, more spending credited

Commerce Dept. report raises hopes for recovery, but growth in hiring lags

October 31, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

The nation's economy, which has struggled since emerging from a recession two years ago, shifted into overdrive in the third quarter and grew at its fastest pace in nearly two decades, propelled by tax cuts, strong consumer and corporate spending and exports.

The gross domestic product, which measures the output of goods and services produced in the United States, surged at a 7.2 percent annual rate in the July-to-September period, up from 3.3 percent in the prior quarter, according to a Commerce Department report.

It was the first time that the gross domestic product topped $11 trillion before adjustments for inflation. The last time the economy grew at a faster clip was in the first quarter of 1984, when it climbed at a sizzling 9 percent.

"It was really a blowout ... a gangbuster number," said Robert T. Sweet, an economist in Baltimore with MTB Investment Advisors. "I was glad to see it. It is a good sign."

"Obviously, it was much stronger than most people expected," said Stephen L. Stanley, senior market economist at RBS Greenwich Capital in Greenwich, Conn.

Most economists don't expect the economy to maintain the blistering pace. They see it slowing to a more normal 3 percent to 5 percent growth rate in coming quarters because the latest number was super-charged by the Bush administration's tax cut, which fueled spending.

"It is an overstatement to say the economy is booming," said Alan D. Levenson, chief economist at T. Rowe Price Associates, a Baltimore-based mutual fund company. "The headlines for the third quarter overstates the strength of the economy, but it is a sign that things are solidifying."

Yet, Levenson and other economists believe the financial underpinnings for long-term growth are in place. Interest rates are at historic lows, the housing industry continues to hum, businesses are starting to spend, and low taxes should give consumers more money to spend.

"We have got these ... major forces all going in the same direction," said Michael Englund, chief economist at MMS International, a financial consulting firm in New York. "The huge tax cut is perfectly timed with increased business spending. Many people's refund checks are going to be much larger than people realize."

"This [expansion] is not a flash in the pan," said Kenneth Mayland, an economist at ClearView Economics in Pepper Pike, Ohio. "This is something that we will measure not in months but in years."

The only missing ingredient for a full-blown recovery is jobs. But economists are optimistic that companies will soon start hiring.

Corporations have refused to add workers to their payrolls for more than two years because they were worried about terrorist attacks and war with Iraq. They also have benefited from a marked rises in productivity that made them even more reluctant to add workers.

So the unemployment rate has risen to 6.1 percent.

One positive sign on the employment front, economists say, is declining claims for jobless benefits. Jobless claims reached 428,000 around Labor Day, but last week they fell to 386,000.

"That is a sign that the labor market is beginning to turn for the better," said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago.

"I think we could see positive job growth in the fourth quarter. It is not going to be overwhelming, but I think you are going to start to see the manufacturing sector slow down on its rate of firing."

Growing corporate profits should mean more jobs, Kasriel said.

"Profits are the key to sustained expansion. Without profits, business don't hire people. Without prospects for profits, businesses don't invest in plant and equipment," he said.

Kasriel expects the unemployment rate to fall to 5.8 percent by this time next year.

Mayland is even more optimistic about the labor market. He sees the economy adding 100,000 jobs by the end of the year, and 2 million jobs by the next presidential election.

"Corporate America is going to be hiring," Mayland said. "We are just about to the point where it is all falling into place."

The economy must grow at an annual rate of 4 percent to add jobs, Mayland said: "I think we are on that path."

Despite yesterday's strong report, the stock market yawned - with the Dow Jones industrial average gaining 12.08 points to close at 9,786.61. The broader Standard & Poor's 500 stock index lost 1.17 points to 1,046.94; and the Nasdaq composite index dipped 3.87 points to 1,932.69.

If the market wasn't impressed, economists were, pointing to a number of positive signals in the economic report.

Consumer spending, which makes up more than 70 percent of the economy, grew at a brisk 6.6 percent rate in the quarter, compared with 3.8 percent in the previous quarter. Businesses, which have been reluctant to spend money, increased their investment in software and equipment by 15.4 percent, compared with 8.3 percent in the second quarter. And exports of goods and services grew by 9.3 percent, compared with a 1 percent decline in the prior quarter.

Kasriel said the increase in exports is a sign the global economy is picking up: "I do think we are making the turn there."

But a growing economy doesn't guarantee that President Bush will be re-elected, economists said. Jobs, they said, will be the key issue.

"If we are sitting here with the unemployment rate at 6 percent, I think he is in a lot of trouble," said Stanley, the economist at RBS Greenwich Capital. "If it continues to grow robustly, you will see job gains. Chances are by next summer ... the economy will probably be a positive for him. I think President Bush would have to consider himself lucky."

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