GDP growth surges 7.2%
Broadest measure of economic growth at strongest pace in 3Q since first quarter of 1984.
October 30, 2003: 10:32 AM EST
NEW YORK (CNN/Money) - U.S. economic growth surged in the third quarter of 2003 to the fastest pace in nearly two decades, the government said Thursday, in a report that was much stronger than most economists expected.
Gross domestic product (GDP), the broadest measure of economic activity, grew at a 7.2 percent annual rate in the quarter after growing at a 3.3 percent rate in the second quarter, the Commerce Department reported. Economists, on average, expected GDP growth of 6 percent, according to Briefing.com.
"This is obviously an extraordinarily strong report, led by the consumer, but also with good signs about the state of the business sector and business confidence," said Lehman Brothers economist Drew Matus.
The burst of GDP growth was led by a 6.6 percent growth rate in consumer spending, the fastest pace since 1988. Consumer spending grew at a 3.8 percent pace in the second quarter.
Child tax credit checks and lower rates of income tax withholding helped fuel the third-quarter spending surge, enabling the Bush administration -- which pushed for tax cuts earlier this year -- to take a victory lap Thursday morning.
"Today's report on real GDP in the third quarter shows that the president's economic policies are having a positive impact on the economy," Treasury Secretary John Snow said.
But U.S. stocks fell in early trading after the report, the strength of which was already expected by many traders. Treasury bond prices also fell, pushing interest rates higher, since bond yields and prices move in opposite directions.
Still few jobs
Many economists expect the impact of the tax cuts to fade in the fourth quarter, and the cash flow from mortgage refinancings, another boon to third-quarter economic growth, is expected to diminish as well. As a result, most economists expect a slower pace of GDP growth, about 4 percent, in the fourth quarter.
A decline in business inventories in the third quarter, however, could mean GDP will get a boost in the fourth quarter, if and when businesses re-stock their shelves.
"The plunge in inventory accumulation does suggest that firms are not confident enough to add merchandise to their shelves," said Anthony Chan, chief economist at Banc One Investment Advisors. "But they will not be able to do this indefinitely because everyone knows that sporting empty shelves in an rising growth environment is not prudent."
In a separate report, the Labor Department said new weekly claims for unemployment benefits were still relatively high in the week ending Oct. 25, pointing to the Achilles' heel of the strengthening economy: a sluggish job market.
In fact, during a quarter with the strongest growth rate since 1984, non-farm payrolls shed a total of 41,000 jobs, according to Labor Department statistics, in part because of strong productivity growth, which enables companies to get more work out of fewer workers.
But job growth is typically a lagging economic indicator, and most economists hope that continued strong demand will eventually catch up with the recent gains in productivity and lead to sustained job growth.
"Since no new jobs were generated in the third quarter, the growth story is entirely based on productivity," said Bill Cheney, chief economist at John Hancock Financial Services in Boston. "The good news for workers is that productivity growth cannot continue at this pace. Demand will translate into jobs very soon, and in fact I think it's happening right now."
"But that's still largely a hope, not a certainty," Cheney added.
Cars, homes lead the charge
Much of the strength in consumer spending in the third quarter was in durable goods, items meant to last three years or more, and much of that strength was in sales of motor vehicles and parts, which alone contributed 1.17 percentage points to the total pace of GDP growth.
Record home sales also contributed to GDP growth in the quarter; residential investment boomed to a 20.4 percent annual pace, compared with 6.6 percent in the second quarter. Residential investment contributed nearly a full percentage point to the total GDP growth rate.
Nonresidential fixed investment rose at a 11.1-percent annual rate, following the second quarter's 7.3 percent pace, a sign of continuing strength in business spending. Investment in equipment and software rose at a 15.4 percent pace, compared with 8.3 percent in the second quarter. Spending on equipment and software contributed 1.18 percentage points to the total GDP growth rate.
Weakness in imports -- which subtract from GDP, since they represent goods and services bought from other nations -- also helped total GDP growth. Imports grew at just a 0.1 percent pace in the quarter, while exports surged at a 9.3 percent growth rate.
Government spending, which contributed mightily to the second quarter's growth rate, slowed down. Defense spending, which grew at a 45.8 percent pace in the second quarter, driven by spending on the war in Iraq, was flat in the third quarter.
The personal consumption expenditure price deflator, an inflation measure closely watched by the Federal Reserve, rose to 1.7 percent from 1.0 percent in the second quarter.
The Fed recently left its target for its key short-term interest rate unchanged at levels not seen consistently since 1958, saying the recent surge in economic growth had not changed its outlook for inflation. The Fed has maintained for several months that it is worried about inflation getting too low, which could hurt corporate profits and economic growth.
"We believe that the Fed will require both consistent solid hiring and a rise in inflation before it begins to lift rates," said UBS Warburg chief economist Maury Harris.
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Economy Grows at Fastest Pace Since 1984
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