Economy improves with 2nd reading

Revised figures put the GDP growth rate at 8.2% for third quarter

November 26, 2003|By William Neikirk | William Neikirk,CHICAGO TRIBUNE

WASHINGTON - The U.S. economy didn't merely shine in the third quarter. It sparkled.

Economic growth in the July-September period raced ahead at a breathtaking 8.2 percent annual rate, a full percentage point above the government's 7.2 percent estimate of a month ago, the Commerce Department said yesterday.

It was the highest quarterly growth rate in gross domestic product - the value of all goods and services produced within the United States - in almost 20 years, and was embraced by President Bush as proof of the effectiveness of his administration's economic policies.

"I think the economy is back," declared an optimistic Mark Zandi, chief economist at "It has evolved from a very fragile recovery to a sustainable rebound."

Even though the economy appears to have lost some of that momentum in the first two months of the fourth quarter, analysts said, it is poised for a solid performance in 2004 that could ease America's biggest economic problem, joblessness.

An 8.2 percent quarter is rare in economic statistics, and about twice as much as the economy's long-term annual growth potential of an estimated 4 percent. "It's like driving your car 100 miles an hour," said Stuart Hoffman, chief economist for PNC Financial Services in Pittsburgh. "It's dangerous to keep going that fast."

Expansion in future quarters is expected to settle down into that longer-term growth pattern of roughly 4 percent, he said, an assessment that matches that of many economists.

In other economic news, consumers' confidence in the economy climbed in November to the highest level in more than a year as people perceived the job market to be turning around, the Conference Board reported. The private research group's consumer confidence index rose to 91.7 in November, up from a revised 81.7 in October.

"The surge in consumer confidence couldn't come at a better time," said Joel Naroff, president of Naroff Economic Advisors. "Households are becoming more confident about the labor markets and the future in general, and that bodes well for this crucial holiday shopping season."

In another report, sales of previously owned homes dropped by 4.9 percent last month, although sales at the seasonally adjusted annual rate of 6.35 million were the third-best month on record.

The main factors behind the upward revision to third-quarter GDP were stronger investment by business on new equipment and software, less severe cuts in companies' inventories and more brisk spending on residential projects.

Some analysts said that, despite the greater surge of GDP growth, they weren't terribly excited about the upward revision.

They said a good part of the higher growth was caused by the fact that there were smaller reductions in inventories than the government had first estimated. Companies apparently rebuilt their stocks by more than expected, contributing to stronger economic growth.

Former Federal Reserve Chairman Lyle Gramley and economists Christopher Probyn of Boston's State Street Bank and Michael Drury of Memphis, Tenn.'s McVean Trading and Investments LLC said this could mean that some of the growth they counted in the fourth quarter actually took place in the third quarter.

Drury said the fourth-quarter growth rate could be as low as 2.5 percent as a result, but others said they expected the GDP to rise in the range of 3.5 percent or higher by the time December's numbers are in. Hoffman predicted a solid Christmas buying season that will help launch a strong 2004.

Many analysts believe that the economic recovery is now in a modest pause and will kick back into a higher gear in the first quarter, when exceptionally large tax refunds are expected to boost consumer spending. "It's the pause that refreshes," said Drury.

At a Las Vegas fund-raiser, President Bush said the third-quarter numbers indicate that "the American economy is strong and is getting stronger. ... Business investment is rising. Housing construction is strong. The job base is expanding. The tax relief we passed is working."

At least one of the challengers for his job, Democrat Howard Dean, criticized the Bush economic record and what he called his "reckless and irresponsible tax cuts and record-setting levels of debt." He said, "It is going to take more than one quarter of growth to dig this country out of this hole."

Unemployment is still at 6 percent despite emergence of a stronger economic expansion. Improvement in the jobs market usually lags behind other economic indicators, but job growth has been slow in this recovery, as companies have laid off workers to stay competitive.

Economists Carl Tannenbaum of Chicago's LaSalle Bank and Brian Wesbury of the Chicago investment banking firm of Griffin, Kubik, Stephens and Thompson Inc. both were upbeat about the latest economic reports and said they presaged a strong 2004, with declining unemployment.

"It's clear the tax cut succeeded in its initial endeavor, to stimulate profits and therefore business orders, and to establish momentum that would serve as a foundation for improving economic results," Tannenbaum said.

Wesbury said he was pleased that business investment, especially business software and hardware, showed more strength in the third quarter than previously estimated. Business investment increased 14 percent, up from an original estimate of 11.1 percent. High-tech investment jumped 22.6 percent, he said.

The Associated Press contributed to this article. The Chicago Tribune is a Tribune Publishing newspaper.

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