The U.S. economy grew at a 3.1 percent annual rate in the July-September period, more than double the second quarter's pace, primarily because of a surge in consumer spending for motor vehicles generated once again by offers of interest-free financing, the Commerce Department reported yesterday.
The latest increase in the inflation-adjusted gross domestic product, a broad measure of the nation's production of goods and services, meant that over the past 12 months the economy grew 3 percent -- a pace too modest to cut into the joblessness created by last year's recession. The unemployment rate in September was 5.6 percent, up from 5 percent in September 2001.
In addition, many analysts said that most of the third-quarter GDP gain came early in the three-month period, with the economy softening since then. Many forecasters are now predicting growth at a weak 1 to 2 percent annual rate in the final three months of the year. One forecasting firm, Macroeconomic Advisers LLC in St. Louis, expects fourth-quarter growth at just a 0.5 percent annual rate, a virtual stalling of growth.
Despite deteriorating financial market conditions during the summer, third-quarter GDP grew at a 3.1 percent annual rate, said Bruce Steinberg, chief economist for Merrill Lynch & Co. in New York. "Unfortunately, that's likely to be the high-water mark on growth for the next couple of quarters," he said.
"Fourth-quarter GDP appears to be growing at around a 1.5 percent rate, and we expect first-quarter growth to also be sluggish. Once recent financial market shocks begin to fade and the conflict with Iraq is past, we expect growth to ramp up again in the spring."
William G. Cheney, chief economist for John Hancock Financial Services Inc. in Boston, agreed that fourth-quarter growth is likely to be slow and that growth should improve at some point next year.
"It's like being caught in heavy traffic. We're moving forward and eventually we'll get where we want to be, but it's maddeningly slow getting there," Cheney said.
Because of such forecasts of slower growth and the uncertainty about the prospect of war with Iraq, which appears to be affecting both consumer and business confidence, many analysts now expect the Federal Reserve to lower its target for overnight interest rates when policymakers meet next Wednesday. Analysts are divided over whether the reduction in the already very low 1.75 percent target would be a quarter- or a half-percentage point.
More than half the third-quarter GDP gain was due to increased consumer spending on durable goods, primarily new cars and light trucks. Since August, vehicle sales have dropped and Steinberg and other analysts predicted they will be a drag on GDP this quarter rather than a plus.
Business spending on new equipment and software rose in the third quarter at a 6.5 percent annual rate, double the weak second-quarter increase. Nevertheless, such spending fell very sharply during the recession and remains far below its 2000 level. And even last quarter, that small gain was offset by a drop in spending for new business structures and for inventories.
The Commerce report showed inflation as being well under control. The overall GDP price index rose at only a 1.1 percent annual rate in the third-quarter, slightly less than in the previous three months. The price index for personal consumption expenditures increased at a 1.9 percent annual rate, down from a 2.7 percent rate in the second quarter.
Meanwhile, the Labor Department said its employment cost index, the broadest measure available of changes in labor costs, rose 0.8 percent in the July-September period and 3.7 percent since September 2001. The important wages-and-salaries component of the index increased just 0.5 percent in the quarter, the smallest such change since mid-1997. Benefit costs rose much more strongly, 1.4 percent in the quarter, primarily because of higher employer costs for health insurance.