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.
The economy was also buoyed by surging defense spending, which rose 9.3 percent between July and September, after a smaller 1.9 percent increase in the previous three months. Defense spending, which reached an annualized rate of $556 billion, accounted for 11.4 percent of total growth in the third quarter.
With the election just three days away, both campaigns seized on the new economic data. The 3.9 percent growth achieved over the past year is good, said Dean Baker, co-director of the Center for Economic and Policy Research, better, in fact, than the 3.5 percent average growth rate in Bill Clinton's first term. But over President Bush's full term, the average growth rate of 2.7 percent is well behind Clinton's two-term 3.7 percent, Ronald Reagan's 3.4 percent, and even Jimmy Carter's 3.3 percent, he said.
Administration officials used the growth figure to buoy Bush's campaign: "The American economy is growing stronger and better than ever," said Commerce Secretary Donald L. Evans. "Today's GDP numbers again prove the U.S. economy is the fastest growing major industrialized economy and the world's leading exporter. President Bush's leadership has put our nation on a path of growth and opportunity."
Gene B. Sperling, a Kerry campaign economic adviser, focused on export growth that continues to lag behind imports and on relatively low business investment. Business investment in software and equipment rose at a healthy 14.9 percent, but non-residential building rose only 1.4 percent, despite surging corporate profits.
"In the last three months, the economic performance was disappointing for middle class families and below expectations -- the results that have become the norm for the economy under President Bush," Sperling said.
Exports did rise 5.1 percent, but that was slower than the 7.3 percent increase in the second quarter. Imports during the third quarter rose 7.7 percent. That export lag shaved 0.9 percent from total economic growth, said Stephen Gallagher, an economist at SG Economic Research in New York.
In a separate report, the Labor Department reported yesterday that wages have risen 2.4 percent over the past 12 months, the slowest growth rate on record and not fast enough to keep up with inflation. Wage growth has now slowed for four straight years, from 2.9 percent in 2003, 3.2 percent in 2002, 3.6 percent in 2001 and 4 percent in 2000.
The liberal Center on Budget and Policy Priorities noted that the share of the economy going to wages and salaries has slipped from 49.5 percent when Bush came to office to 45.4 percent in the third quarter of 2004, even as corporate profits have risen as a share of gross domestic product over that time, from 7.8 percent to 10.1 percent. After adjusting for inflation, total wage and salary income is just about where it was nearly four years ago, said Isaac Shapiro and David Kamin, two economists with the center.
Wall Street economists were more upbeat about the quarterly numbers, even if they came in below the consensus 4.3 percent forecast.
"All in all, it's quite a positive number," said Mickey Levy, chief economist at Bank of America.