Hurricanes Didn't Stop Economy From Growing

Retail prices rose faster than after-tax incomes in the third quarter, the Commerce Department government said.
Retail prices rose faster than after-tax incomes in the third quarter, the Commerce Department government said. (By Kimberly White -- Bloomberg News)
By Nell Henderson
Washington Post Staff Writer
Saturday, October 29, 2005

The U.S. economy grew briskly in the third quarter, despite the damage inflicted by hurricanes Katrina and Rita on the Gulf Coast and the bite of high energy prices on household budgets, the government reported yesterday.

Consumer spending quickened, businesses invested more and the government poured money into hurricane relief, causing the economy to expand at a 3.8 percent annual rate in the third quarter, the Commerce Department reported.

Economic activity would have expanded even more if the hurricanes hadn't destroyed homes and workplaces, disrupted shipping systems and pushed inflation higher, economists said.

The report "confirmed the resilience of the U.S. economy under strenuous circumstances," said Eugenio J. Alemn, senior economist at Wells Fargo Financial Market Strategies.

Economic activity has cooled since the summer, analysts said. Auto sales have fallen after booming in July. Hiring was robust in July and August, but thousands of jobs were lost in September because of the hurricanes.

Meanwhile, consumer prices rose faster than after-tax incomes in the third quarter, leaving households with less purchasing power. And consumers spent more than their after-tax incomes, producing a negative personal saving rate for the first time since the government began collecting quarterly data in 1947.

"We expect that growth will slow in the fourth quarter, in large part because consumer spending growth will decline due to higher energy costs" and more sluggish auto sales, said Nigel Gault, U.S. economist for Global Insight. "But that should prove temporary, and growth will pick up again in the first half of 2006."

The nation's gross domestic product, a broad measure of the value of all goods and services produced, rose at a 3.8 percent annual rate in the third quarter, up from a 3.3 percent pace in the second quarter, the Commerce Department said. That first estimate of GDP growth could be revised in coming months.

The gain in economic momentum largely reflected faster growth in consumer spending, which accounts for about two thirds of economic activity, the Commerce Department said.

The department said it could not quantify the hurricanes' economic effects. The Labor Department said Thursday that 502,000 people have filed new claims for unemployment insurance benefits because of the storms.

Agricultural products processor Archer Daniels Midland Co. said yesterday that its profit fell about 30 percent in the third quarter from the comparable quarter last year because the hurricanes reduced its grain sales. But FedEx Corp. is preparing to deliver more packages than ever this holiday season, the company's chief economist, Gene Huang, said Wednesday in a written statement.

Consumer prices rose at a 3.7 percent annual rate in the third quarter, according to the Commerce Department. That was the highest quarterly rate since the spring of last year.

Consumer inflation remained tame except for food and energy prices. So-called core prices rose 1.3 percent, annualized, in the last quarter, well within the Federal Reserve's comfort zone.

Fed officials, nonetheless, are considered likely to raise their benchmark short-term interest rate when they meet on Tuesday, to 4 percent from 3.75 percent, to keep inflation under control.

After-tax incomes rose at a 2.8 percent annual rate. But after adjusting for inflation, after-tax personal income fell at a 0.9 percent annual rate in the third quarter.

Because consumer spending rose faster than after-tax personal income, the personal saving rate fell to minus 1.1 percent in the third quarter from 0.1 percent in the second quarter. That indicates that people spent money from savings, borrowing or selling houses, stocks or other assets.

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