By Jeannine Aversa
Associated Press Writer
Thursday, October 28, 1999; 9:39 a.m. EDT

The Commerce Department reported today that the increase in the gross domestic product – the total output of goods and services – in the third quarter followed a sluggish 1.9 percent rate of growth in the April-June quarter as America's soaring trade deficit cut sharply into growth.

Even though the trade deficit worsened further in the third quarter, it was offset by strength in most other categories, including robust consumer spending and a strong buildup in inventories held by businesses.

The 4.8 percent GDP growth was the fastest pace since a 5.9 percent surge in the final three months of last year and was even better than many economists had been expecting.

In a second report today, the Labor Department said American workers' wages and benefits rose by 0.8 percent in the third quarter, slightly lower than the 0.9 percent increase many economists were expecting, indicating little inflationary pressures coming from rising wages. In the past 12 months, employment costs rose a moderate 3.1 percent.

Financial markets, which have been jangled in recent weeks over fears that the economy is growing so rapidly that the Federal Reserve could step in and raise interest rates for a third time this year, rallied on the benign employment-cost report. The yield on the 30-year bond, which had hit a two-year high in recent days, retreated in early trading.

But economists said the Fed is still likely to focus on the fact that the economy as shown by the GDP report is still growing at a much faster rate than Fed Chairman Alan Greenspan would prefer.

"The GDP report probably offsets the more benign employment cost report and leaves the Fed ready to tighten on Nov. 16," said Paul Kasriel, chief economist for The Northern Trust Co.

An inflation gauge tied to the GDP also showed modest price pressures, rising at an annual rate of 1.6 percent in the third quarter. That was even better than the tiny 1.9 percent increase for the second quarter.

In a third report, the government said that the number of Americans filing for unemployment benefits last week fell by 15,000 to 278,000, indicating that the labor market remains exceptionally tight.

The booming U.S. economy has been powered by robust consumer spending, which accounts for two-third of total economic activity.

The government said today that consumer spending in the third quarter rose at a solid annual rate of 4.3 percent, down slightly from 5.1 percent growth in the second quarter.

Businesses, confident that consumers will keep spending, increased their stockpiles by $14.1 billion in the third quarter. A slowdown in inventory building and the worsening trade deficits were the major factors holding back growth in the second quarter.

America's swelling trade deficit subtracted $343 billion from GDP in the third quarter at an annual rate, an even bigger drag than in the second quarter.

But the continued robust consumer spending and solid gains in business investment in new plants and equipment and housing construction more than offset the drag from trade.

All of today's figures reflected a comprehensive overhaul in the way the government calculates the GDP, making changes in the figures back to 1959. The GDP revisions showed the economy grew at a significantly faster rate in recent years with an increase in 1998 of 4.3 percent and even bigger 4.5 percent rise in 1997, the fastest surge in economic activity in 13 years.

The changes also show lower inflation and Americans saving more than previously thought.

The nation's personal savings rate – savings as a percentage of disposable income – which had dipped to record lows in negative territory was 2.1 percent in the third quarter under the new calculations.

Under the new GDP methodology, savings associated with a worker's government pension plan will be counted as personal savings, rather than government savings. That doesn't affect the GDP, but it does boost the nation's personal savings rate.

The other major change the government made in its GDP calculations was a redefinition of how to account for business spending on computer software. Previously, these purchases were considered a raw material and not counted as part of GDP. Under the new approach, business purchases of software are considered an investment and do add to the GDP totals.

The government in its overhaul also changed the base year for prices from 1992 to 1996.

All the various changes show the GDP growing at an annual rate of $8.88 trillion in inflation-adjusted dollars in the third quarter of the year. Before adjusting for inflation, GDP in the third quarter totaled $9.28 trillion.