The U.S. economy grew at a hefty 5.5 percent annual rate in the July-September period, a remarkably rapid pace for an economic expansion only a few months shy of its ninth birthday, the Commerce Department reported yesterday.
"The U.S. economy remains in overdrive," said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. "We expect the fourth-quarter gross domestic product to rise at about a 5 percent rate [and then] to moderate slightly to a 3.5 percent to 4 percent rate during 2000."
Last month, Commerce had estimated third-quarter economic growth at a somewhat slower but still strong 4.8 percent annual rate. It revised that estimate upward yesterday on the basis of more complete information about economic developments during the period.
Even with such rapid growth and an unemployment rate just above 4 percent, inflation remained extremely low during the summer.
Prices paid by consumers, businesses and governments for their purchases--regardless of whether the goods and services were produced in the United States or imported--rose at a 1.7 percent rate in the third quarter. Excluding the volatile prices of food and energy items, the increase was at only a 1.2 percent rate.
Since the beginning of 1997, the booming U.S. economy has enabled American households, businesses and governments to increase the purchases of the goods and services they want at more than a 5 percent annual rate, a level of prosperity virtually unparalleled in the nation's history.
Families have snapped up new cars, houses, furnishings and vacations. Businesses have stocked up on computers and other information-processing equipment. And governments have built new highways or repaired old ones, upgraded computer systems and stepped up military outlays.
While the production of goods and services in this country has been rising very rapidly, it has not increased fast enough to supply all the things American have wanted to buy. Demand for goods and services has gone up at nearly a 5.5 percent rate since the beginning of 1997, but GDP, which is a measure of production of goods and services in the United States, has increased at about a 4 percent pace.
This gap between demand and production has been filled by a rapid rise in imports that has added to a yawning deficit in U.S. trade with the rest of the world. Exports have been going up as well, but imports have been rising much faster than exports.
Nearly a full percentage point of the 5.5 percent increase in third-quarter GDP was the result of businesses adding to their stockpiles of unsold goods and of materials and components they will use in the future to produce finished items. Analysts said these additions to inventories are related to firms stocking up in anticipation of possible economic disruptions at the beginning of next year because of the year 2000 computer problem. The companies want to prevent their own operations from being hurt if supplies of critical materials are interrupted even temporarily.
"Looking forward to the fourth-quarter GDP data, we expect to see still higher inventories, partly due to Y2K inventory-building late in the quarter," said Dana Saporta, an economist with Stone & McCarthy Research Associates, a financial markets research firm.
"We currently put the inflation-adjusted GDP growth rate in the fourth quarter at 5 percent to 5.5 percent. To the extent inventory-building is a large contributor, then we could see a slower GDP performance in the first quarter of next year" as businesses let their inventories decline again to more normal levels, Saporta said.
In the first half of this year, businesses cut back their purchases of items intended for their inventories, which held down GDP. For instance, in the second quarter inflation-adjusted GDP rose at only a 1.9 percent rate, but the gain would have been at a much stronger 3.4 percent rate except for a decline in the pace of spending on inventories. Inventories were also a drag on the two prior quarters' GDP increases.
Merrill Lynch's Steinberg noted that the upward revision in third-quarter GDP means there will also be an upward revision in the already strong figures for labor-productivity growth in the quarter.
The GDP numbers released yesterday suggest that productivity "grew at around an incredible 5 percent rate in the third quarter," Steinberg said. He added: "Accelerating productivity growth raises the growth potential of the U.S. economy, which is why inflation is a non-problem."
By that, Steinberg meant that productivity gains offset increases in employers' labor costs, allowing workers pay to rise without necessarily putting pressure on firms to raise the prices of the goods and services they sell in order to maintain their profitability.
Even with productivity gains accelerating, some Federal Reserve officials, led by Chairman Alan Greenspan, remain concerned that economic growth is so strong that sooner or later it will cause inflation to increase. To rein in growth somewhat, the Fed raised its target for overnight interest rates last week by a quarter of a percentage point, to 5.5 percent. That was the third such increase since late June.
Some analysts say additional rate increases could come as soon as the beginning of February if growth doesn't slow to what Fed officials regard as a sustainable pace--which with strong productivity gains could mean a GDP growth rate of 3.5 percent.
"The Fed already has issued its 'speeding ticket' for unacceptably fast real GDP growth, and the more relevant issue is where the economy is heading now," said Maury N. Harris, chief economist at PaineWebber Group Inc. in New York.
"We still foresee inventory-led growth of 4 percent in the current quarter followed by a moderate slowdown to 3.3 percent real GDP growth in the year 2000," Harris said.
If growth were to slow to such a pace and inflation remained quiescent, then the Fed might not raise rates again for quite some time, according to some analysts.
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