Economy Grew Briskly in 3rd Quarter

By Nell Henderson
Washington Post Staff Writer
Thursday, December 1, 2005

The U.S. economy expanded rapidly in the summer and early fall, despite the devastation and disruption of the Gulf Coast hurricanes, the government reported yesterday, significantly boosting its earlier growth estimate.

Rising consumer and business spending helped spur economic growth at a robust 4.3 percent annual rate in the third quarter, the best pace in more than a year and a big acceleration from the 3.3 percent pace of the spring, the Commerce Department said. Its earlier estimate, based on incomplete data, was 3.8 percent annual growth in the third quarter.

The economy heated up in July and August, as consumers snapped up discounted cars, businesses loaded up on new equipment and software, and builders invested more heavily in a hot housing market. But many analysts had worried about the possibility of a sharp slowdown after Hurricane Katrina hit the Gulf Coast Aug. 29, wiping out hundreds of thousands of jobs and damaging oil rigs, gasoline refineries, pipelines, chemical plants, roads, bridges, ports and railroad tracks. Energy prices skyrocketed and stayed high when Hurricane Rita hit in late September.

Yet the economy performed "amazingly well," said Stuart G. Hoffman, chief economist at PNC Financial Services Group. Since September, he said, other reports showing healthy retail spending, factory orders and home sales suggest that "the economy's growth is on a pretty solid track."

Some analysts were more cautious, noting that the Commerce Department's revised figures also showed that U.S. consumers overall spent more than their combined after-tax incomes in both the second and third quarters, resulting in a negative personal saving rate for both periods. That was the first occasion on record of two consecutive quarters with negative savings. Consumers can spend more money than they take home by borrowing, withdrawing savings or selling stocks, bonds or other assets.

The report of quickening economic activity in the third quarter "is less an indication of renewed strength than an indication of heavily borrowing current growth from the future," Charles W. McMillion, chief economist for MBG Information Services, wrote in an analysis for clients.

The economy probably is cooling a bit in the last three months of the year but will still expand at a solid annual rate of 3 to 4 percent, analysts said.

The Commerce Department calculates the nation's gross domestic product -- the total value of all goods and services -- based on various economic data, which trickle in to the government over time. Estimates are revised continuously over months and years as more information is available, gradually clarifying the economic picture. The department first estimated in late October that the GDP grew at a 3.8 percent annual rate but revised that figure to 4.3 percent after new data showed faster increases in consumer and business spending in several categories.

Even with higher energy prices, consumer spending rose at a 4.2 percent annual rate in the third quarter, the fastest since the end of last year, the department said.

Many businesses struggled initially after the storms but quickly worked around the disruptions to find different suppliers and delivery methods. Businesses increased their spending on equipment and software at a 10.8 percent annual rate in the third quarter, nearly the same pace as in the second quarter, the Commerce Department said.

Since September, oil and gasoline prices have come back down to levels near or below what they were before the storms. And while many consumers and businesses may have trimmed their spending because of concerns about energy prices, the holiday shopping season got off to a good start, according to retailers' first reports.

The spike in energy prices did little to boost prices of other goods. Consumer prices, except for food and energy, rose at a 1.2 percent annual rate in the third quarter, the department said.

The hurricanes walloped the Gulf Coast job market. But many employers across the country continued to hire new workers through the fall, roughly offsetting the job losses in September and October and keeping the national unemployment rate around 5 percent.

The strong GDP report strengthened financial market expectations that Federal Reserve officials will raise their benchmark short-term interest rate to 4.25 percent from 4 percent at their next meeting, Dec. 13.

With economic growth so strong, they also appear likely to nudge the rate up again to 4.5 percent at their meeting Jan. 31, and, possibly, to 4.75 percent in March, analysts said.

Fed policymakers said in a statement released after their meeting last month that the hurricanes had only "temporarily depressed" employment and economic activity.

Since then, businesses have increased hiring in many industries, causing "modest overall upward pressures on wages," according to a Fed survey released yesterday. Employers said it was more difficult to find truck drivers in the Midwest, construction workers in the Gulf Coast states, energy industry workers in the Southwest and health care providers in the West.

If the economy performs as expected for the rest of the year, the nation's gross domestic product will have increased at an annual rate of at least 3.5 percent in the second half of the year, Hoffman said. "That's not gangbusters, but a solid pace of economic growth."

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