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Spending, economy grow at healthy pace

The U.S. economy, propelled by tax cuts and low interest rates, roared ahead at an 8.2 percent annual rate in the third quarter, the best showing in nearly 20 years, while Americans' incomes and spending both showed healthy gains in November.
/ Source: The Associated Press

Americans' incomes and spending both showed healthy gains in November, while the U.S. economy, propelled by tax cuts and low interest rates, roared ahead at an 8.2 percent annual rate in the third quarter, the best showing in nearly 20 years.

The government reports Tuesday on personal incomes and spending and the gross domestic product, the country's broadest measure of economic health, provided further evidence that the economy was convincingly shaking off a prolonged period of lethargy and beginning to fire on all cylinders.

The Commerce Department report that the GDP grew at an 8.2 percent rate in the third quarter, propelled by a surge in consumer spending, was identical to the preliminary estimate made a month ago and represented the strongest growth since an 8.4 percent rate of increase in the fourth quarter of 1983.

In a separate report, the government said consumers were remaining active in the current quarter with consumer spending rising by 0.4 percent in November, the best showing since August, and incomes, helped by rising employment levels, posted an increase of 0.5 percent last month, the best gain since May.

Many analysts believe that GDP growth in the current quarter could well top 5 percent, representing the best back-to-back growth rates since the boom years of the 1990s.

The economy began the year growing at much slower rates of 2 percent in the first quarter and 3.1 percent in the second quarter before the jolt from a new round of tax cuts propelled consumer spending in the third quarter.

Growth has also been helped this year by the Federal Reserve’s decision to keep a key interest rate at the lowest level in 45 years, providing strength to such interest rate-sensitive sectors as housing and auto sales.

All of the GDP figures released Tuesday reflected a comprehensive revision that the government does every five years to make sure the measurement of total output keeps up with the times. With the changes, the GDP grew by 2.2 percent for all of 2002, down slightly from the previous estimate of 2.4 percent.

The benchmark revisions and the changes to third quarter GDP showed a number of crosscutting revisions that basically offset each other to make little impact on the bottom-line number.

For the third quarter, consumer spending was revised up to an even-stronger 6.9 percent rate of growth, the best showing since the third quarter of 1986, compared to last month’s estimate of 6.4 percent.

But private investment, which covers housing construction and business spending on plants and equipment, was revised down to a 14.8 percent rate of increase, reflecting slightly less business investment which offset a bigger increase in housing construction.

Even with the strong growth, inflation remained under control with a price gauge tied to the GDP rising at an annual rate of just 1.8 percent in the third quarter.

The monthly incomes and spending report showed that 0.4 percent November jump in consumer spending, which accounts for two-thirds of total economic activity, followed a tiny 0.1 percent rise in October and no change at all in September. However spending had soared by 0.9 percent in August, reflecting the burst of activity spurred by the tax cuts which went into effect in July.

The 0.5 percent rise in personal incomes followed much smaller increases of 0.2 percent in October and 0.3 percent in September. The strength last month came from a big wages and salaries, which rose by $16 billion in November compared to an October gain of $8.2 billion.

After an extended period of layoffs, employers have begun adding workers to their payrolls, which should help bolster incomes even more in coming months.