U.S. economy flashes some torrid growth

8.2% rate in 3rd quarter best in nearly 20 years

`That's about as good as it gets'

Current period expected to show a solid 4% to 4.5%

December 24, 2003|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

With a big helping hand from consumers, the U.S. economy grew by an 8.2 percent annual rate in the third quarter - its best performance in any quarter in nearly 20 years and bolstering expectations for a strong economic recovery that will carry through next year's presidential election.

"That's about as good as it gets for any one quarter," said Stuart Hoffman, chief economist with PNC Financial Services Group in Pittsburgh.

"Most economists generally accept that the economic long-term rate of growth is around 3.5 percent," said Richard DeKaser, chief economist with National City Corp. in Cleveland. "When you more than double the expected trend rate, that's certainly a very strong performance."

The Commerce Department released yesterday its third, and final, estimate of economic growth for the months of July, August and September as measured by the Gross Domestic Product - the total value of goods and services produced in the country.

The rate remains unchanged at 8.2 percent from last month's estimate.

Such torrid growth hasn't been seen since the fourth quarter of 1983, when the economy grew by an annual rate of 8.4 percent. Economists don't expect the economy to maintain that pace in the current fourth quarter, which ends Dec. 31, although many anticipate a growth rate ranging from 4 percent to 4.5 percent.

"It's still a very solid above-average growth. And coming on the heels of 8.2 percent, that's a strong back-to-back performance for the U.S. economy," Hoffman said.

Some revisions

While the GDP's overall growth rate didn't change from last month's estimate, revisions occurred in some categories that make up the economic measure.

Business spending on inventory was revised downward. That was offset by consumer spending, which grew at 6.9 percent, faster than the earlier estimate of 6.4 percent.

The third quarter had the "perfect confluence" of events that put money in the pockets of consumers, who spent it, DeKaser said.

A drop in income tax rates began to show up in paychecks in July, he said. Advanced refund checks were mailed in late summer to those who qualified for the $400 increase in the child tax credit. And an unprecedented period of mortgage refinancings reduced homeowners' monthly loan payments.

Income and spending

The spending continued into November, according to separate report also released yesterday. The Commerce Department said personal income rose 0.5 percent last month, while personal spending increased by 0.4 percent.

Yesterday's reports gave further proof to investors that the recovery was on track, and stock prices rose slightly.

The Dow Jones industrial average, composed of 30 blue-chip stocks, gained 3.26 points to close at 10,341.26. The broader Standard & Poor's 500 index rose 3.08 to 1,096.02. And the Nasdaq composite index, laden with technology stocks, increased by 18.98 points to 1,974.78.

Consumer spending accounts for about two-thirds of the economy. People aren't expected to stop their shopping this quarter, traditionally the heaviest period for retail, but economists anticipate the growth rate of spending to slow.

The business factor

The heavy lifting in the economy for the fourth quarter will be done by businesses, economists said. Companies will be shelling out money to boost depleted inventories and to update equipment, including industrial machinery and software.

"Business confidence is stronger. That means we are seeing and will continue to see improved capital spending," said Paul Kasriel, chief economist with Northern Trust Co. in Chicago.

"As we move forward in the next several quarters, we will see business spending, inventories and exports take on a larger role."

For the most part, economists' forecasts are rosy for the presidential election year. Predictions for an economic growth rate range from 4 percent to 4.9 percent. Inflation is expected to stay in check. The growth in corporate earnings should remain healthy, but not as robust as this year, economists said.

"The election year is always good for the economy," said Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis. "We had tax cuts in part because it's an election year. Also, the Federal Reserve is not likely to hike the interest rates in an election year unless they have a very, very good reason."

There are issues lurking that could pose serious problems, however, from a soft job market to the weak U.S. dollar.

"Employment is still a risk. If employment doesn't pick up greater steam or momentum, consumer spending can peter out, taking down the whole economy," Sohn said.

With 400,000 fewer jobs than a year ago, the unemployment rate stands at 5.9 percent, Sohn said.

Despite concerns about employment, Sohn predicts that on average 150,000 jobs will be created per month next year, whittling the unemployment rate to 5.2 percent by the end of 2004.

The weak dollar, near its low point against the euro, is "an accident waiting to happen," Kasriel said. A weak currency makes imports more expensive for U.S. consumers, and puts domestic producers in a better position to raise prices, he said. That can bring inflation, and lead the Fed to considering raising interest rates, a problem for debt-laden consumers, he said. Like others, though, Kasriel doesn't expect a big spike in interest rates next year.

"The Fed will probably raise interest rates in 2004, but not until it's sure that the economy can take some interest rate increases," Kasriel said.

"I don't think the Fed wants to risk derailing this expansion going into November 2004."

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