Friday, October 31, 2003

15.4% Surge in Business Investment, USG Spending Rises by Only 1.4%

According to the "official" statistics, the economy is growing at the fastest pace since 1984...

Associated Press story by Jeannine Aversa

WASHINGTON (AP) - The economy grew at a blistering 7.2 percent annual rate in the third quarter in the strongest pace in nearly two decades. Consumers spent with abandon and businesses ramped up investment, compelling new evidence of an economic resurgence.

The increase in gross domestic product, the broadest measure of the economy's performance, in the July-September quarter was more than double the 3.3 percent rate registered in the second quarter, the Commerce Department reported Thursday.

The 7.2 percent pace marked the best showing since the first quarter of 1984. It exceeded analysts' forecasts for a 6 percent growth rate for third-quarter GDP, which measures the value of all goods and services produced within the United States.

"This is a gangbuster number. Everything came together for the economy in the third quarter," said Mark Zandi, chief economist at Economy.com. "The key challenge now is jobs," he said.

On Wall Street, stocks were mixed. The Dow Jones industrials were down 2 points, while the Nasdaq was up 2 points in morning trading.

President Bush's spokesman, Scott McLellan, told reporters aboard Air Force One en route to Columbus, Ohio, that "today's numbers are another positive sign" that the president's strategy for boosting the economy by cutting taxes "is working, getting more money into people's pockets."

"While the economy is moving in the right direction, because of the actions that we have taken, there is more work to be done," McLellan said. "We need to contine to act and build upon the steps we have taken to get our economy growing so we can continue to translate growth into job creation."

The economy's recovery from the 2001 recession has resembled the side of a jagged cliff; a quarter of strength often has been followed by a quarter of weakness. But analysts are saying that pattern could be broken, considering increasing signs the economy finally has shaken its lethargy and is perking up.

Near rock-bottom short-term interest rates, along with President Bush's third round of tax cuts, have helped the economy shift into a higher gear during the summer, economists said. The next challenge is making sure the rebound is self-sustaining, they said.

Democrats, however, argue that the tax cuts contributed to a record budget deficit in the recently ended 2003 fiscal year and have done little to spur significant job growth.

"This has largely been a jobless recovery," said Sen. Kent Conrad, D-N.D.

Although the nation's payrolls grew by 57,000 in September - the first increase in eight months - the economy needs to add a lot more jobs than that each month to drive down the 6.1 percent unemployment rate, analysts have said.

The administration has argued that as economic growth improves, meaningful job creation will follow. Bush will be counting on that as he heads into the 2004 presidential election season.

In other encouraging economic news from the Labor Department, new claims for unemployment benefits last week dropped by 5,000 to 386,000, a sign that layoffs are slowing. U.S. workers' wages and benefits went up by 1 percent in the third quarter, up slightly from a 0.9 percent increase in the previous quarter.

Economists believe the economy will grow at a slower - but still healthy - 4 percent rate in the final quarter.

In the third quarter, consumers ratcheted up their spending at a brisk 6.6 percent annual rate. That was the biggest increase since the first quarter of 1988 and was up from a 3.8 percent pace in the second quarter.

Consumers in the third quarter spent lavishly on big-ticket items, such as cars, boosting such spending by a whopping 26.9 percent rate. And, they also spent briskly on "nondurables" such as food and clothes, which grew at a 7.9 percent pace, the strongest showing since the first quarter of 1976.

While consumers have been the main force keeping the economy going, there are more signs that businesses are starting to do their part.

Especially encouraging was the 15.4 percent growth rate in spending by businesses on equipment and software in the third quarter. That marked the largest increase since the first quarter of 2000 and was up from a 8.3 percent growth rate in the second quarter.

Sustained turnarounds in capital spending and in hiring are crucial to the economy's return to full throttle. Economists said business wants profits to improve and wants to be sure of the recovery's vigor before it goes on a spending and hiring spree.

The red-hot housing market, powered by low mortgage rates, also contributed to the strong showing on third quarter GDP. Investment on residential projects grew at a 20.4 percent rate, the biggest increase since the second quarter of 1996, and more than three times the 6.6 percent growth rate seen in the second quarter.

Federal government spending, which grew at a 1.4 percent rate, was only a minor contributor to GDP in the third quarter. Spending on national defense was flat. But in the second quarter, military spending on the Iraq war - which grew at a whopping 45.8 percent rate - helped to catapult economic growth.

A better trade picture in the third quarter also contributed to GDP growth.

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