Economy Grows at 3.7% Rate

Campaigns Jump on 3rd-Quarter Figure

The economy grew at a solid annual rate of 3.7 percent in July, August and September, driven by swelling demand for automobiles and other big-ticket items and consumers willing to spend considerably more than they earned, the Commerce Department said Friday.

The last major economic statistic before Tuesday's election provided fodder for both President Bush and Democratic challenger John F. Kerry. Bush campaign officials seized on the strong growth as evidence that the president's tax cuts are working, while Kerry campaign aides highlighted sluggish wage increases, a rising trade deficit and tapped-out consumers.

The third-quarter growth rate for the nation's production of goods and services actually fell below most economists' expectations, but exceeded the 3.3 percent annualized rate of the previous quarter, April through June.

"This is analogous to a car moving at a 55-mile-per-hour pace," said Richard Yamarone, director of economic research at Argus Research Co. in New York. "We're no longer speeding, but we're not stalled either. We're right at the speed limit."

The largest driver in the nation's economic growth last quarter was personal consumption, which rose 4.6 percent, compared with an increase of 1.6 percent in April, May and June, the Commerce Department reported. Sales of big-ticket items, especially cars and trucks, leaped 16.8 percent, compared with a slight decline in the preceding quarter. More than a quarter of total growth came from the sale of motor vehicles and parts alone, as consumers jumped at rebates, cut-rate financing and other incentives.

Some General Motors dealerships in the Kansas City area offered a Chevrolet subcompact car with the purchase of a giant Tahoe or Suburban sport utility vehicle, Yamarone said. The value of auto sales incentives exceeded $6,000 a vehicle in September, a record, according to Art Spinella, president of CNW Marketing Research Inc. in Oregon.

"Consumers are spending everything they can possibly get their hands on," Yamarone said. "Prices are still low and deals, particularly in autos, are just too good to walk away from."

To finance those purchases, consumers had to dig deep in their wallets, if not their bank accounts. Disposable personal income rose $53 billion, less than half the increase recorded between April and June, but personal spending jumped by $123.8 billion, or 6 percent. That pushed the savings rate from 1.2 percent in the second quarter to a scant 0.4 percent in the third, the lowest rate since the Depression, said Sung Won Sohn, chief economist at Wells Fargo Banks. Rising energy prices are likely to dampen that kind of spending this winter, as consumers juggle their appetites for goods with their need to heat their homes and fill their gas tanks.

Inflation-adjusted income rose 1.4 percent, compared to 2.4 percent the quarter before.

"The bottom line here is, the pace of job and income growth is not enough to sustain spending growth, even with stable energy prices," said Richard Berner, chief U.S. economist at Morgan Stanley.