Economy grew at annual rate of 3.7% in 3Q

GDP bounce is tempered by lackluster pay, exports

Oil, end of tax breaks loom

Last report before voting sparks partisan claims

October 30, 2004|By NEW YORK TIMES NEWS SERVICE

The economy picked up speed in the third quarter to expand at a 3.7 percent annual rate, the government reported yesterday.

Growth in the nation's output of goods and services exceeded the 3.3 percent rate registered in the second quarter - when the economy was held back by a surge in energy prices that took a bite out of American household budgets and dented consumer spending.

Yet despite the third quarter's bounce, economists remained concerned that challenges from high oil prices and lackluster wage and job growth, too-weak exports and the end of corporate tax breaks could inhibit economic expansion in coming quarters.

"It's pretty good news on the economy," said Richard D. Rippe, chief economist of Prudential Equity Group LLC. "But the uncertainty that hangs over the whole thing is oil. What oil prices do going forward is critical."

Coming out just days before the election, the report was seized on by supporters of both presidential candidates as providing support for their campaign positions.

The data, released by the Commerce Department, underscored the importance of consumers in keeping the economy moving.

Business investment remained robust in the quarter. Yet the accumulation of inventories slowed - a sign of business concern over future demand. Trade also exerted a drag on growth as exports grew substantially less than imports.

Nearly nine-tenths of the economic growth recorded during the third quarter was accounted for by personal consumption. Purchases of durable goods sped ahead by 16.8 percent, the fastest pace in over a year. Car sales alone accounted for more than a quarter of economic growth during the period.

"The American consumer is the spender of last resort for the world economy," said Richard B. Hoey, chief investment strategist of the Dreyfus Corp. "This has the side effect of a high trade deficit and a low savings rate."

But consumers also revealed a vulnerability that could hinder growth in coming months - because even as their spending accelerated, their income growth slowed, leading to a fall in the personal savings rate to 0.4 percent of disposable personal income, its lowest ever.

"Clearly, borrowing continues to be the major factor driving consumption, as low interest rates have sustained both car buying and the drawing down of home equity," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

The weak income picture was underscored by new figures from the Labor Department that showed wages of regular workers in the third quarter grew by 2.4 percent over the quarter in 2003, the lowest rate on record, and below the inflation rate of 2.7 percent during the period.

Baker added that business investment is likely to moderate next year as the tax breaks that allow businesses to quickly depreciate their investment expire at the end of 2004.

With the economy advancing at a moderate pace without substantial inflation, economists believe the Federal Reserve is likely to remain on the path of gradually increasing interest rates.

The third quarter economic growth was the last item of substantial economic news before the election Tuesday, and both sides on the political divide jumped on the release.

"GDP continues to grow above the average of the 1970s, '80s and '90s while the unemployment rate remains below the average for those decades," Treasury Secretary John W. Snow said in a news release.

Yet the campaign of Sen. John Kerry pointed out that business investment declined by 0.5 percent during President Bush's administration - the first time this has happened since the 1930s, while exports of goods also declined.

"Most middle-class families will find it difficult to swallow the Bush administration's spin that this is the best economy of our lifetime," said a statement by Gene Sperling, an economic adviser to Kerry.

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