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U.S. economy still growing at strong rate

Economic activity expanded at an energetic 3.8 percent annual rate in the third quarter, providing vivid evidence of the economy’s stamina even as it coped with the destructive forces of hurricanes Katrina and Rita.
/ Source: The Associated Press

Economic activity expanded at an energetic 3.8 percent annual rate in the third quarter, providing vivid evidence of the economy’s stamina even as it coped with the destructive forces of hurricanes Katrina and Rita.

The latest snapshot of the country’s economic performance, released by the Commerce Department on Friday, even marked an improvement from the solid 3.3 percent pace of growth registered in the second quarter.

Growth in the third quarter was broad-based, reflecting brisk spending by consumers, businesses and government.

“Holy Katrina! The economy weathered two major hurricanes and in spite of that showed accelerated growth,” said Ken Mayland, president of ClearView Economics. “I think what this shows is that fundamentally the economy was and is in really good shape.”

The expansion in gross domestic product in the July-to-September quarter, the strongest since the beginning of the year, also exceeded many analysts’ expectations. Before the report was released, they were forecasting the economy to clock in at a 3.6 percent annual rate.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the nation’s economic fitness.

Katrina, the costliest natural disaster in U.S. history, struck in late August; Rita hit in late September. Both hurricanes destroyed businesses and homes and choked the flow of trade. They also hobbled essential oil and gas facilities, catapulting energy prices higher and fanning inflation fears.

An inflation gauge tied to the GDP report showed overall inflation picking up in the third quarter. But excluding food and energy prices, “core” inflation — something the Federal Reserve pays close attention to — actually moderated. Core inflation rose at a rate of 1.3 percent in the third quarter, down from a 1.7 percent pace in the second quarter.

In another inflation barometer, employers’ labor costs — wages and benefits — rose 0.8 percent in the third quarter, up slightly from a 0.7 percent increase in the second quarter, the Labor Department reported. The showing for the third quarter matched economists’ forecasts.

Despite the sting of high energy bills, consumers continued to spend, doing their part to keep the economy rolling in the third quarter.

Consumers’ boosted spending at a brisk 3.9 percent rate, the strongest pace since the end of last year. That spending reflected a big appetite for big-ticket “durable” goods, such as cars, which had been discounted and promoted to lure buyers. Some analysts believe consumer spending probably will moderate, but still remain healthy, in the months ahead.

Businesses increased spending on equipment and software at an 8.9 percent pace in the third quarter, on top of a 10.9 percent growth rate in the prior quarter.

Spending by the federal government, which analysts believe included some outlays due to the hurricanes, rose at a 7.7 percent rate in the third quarter, the fastest pace since the first quarter of 2004.

The report comes as President Bush, faced with sagging approval ratings, struggles to improve the public’s confidence in his economic stewardship. Three-quarters of those surveyed rate the current economy as fair or poor — and most blame Bush, according to an AP-Ipsos poll.

Private analysts say the overall economy is actually doing better than the public’s perception, which has been shaped by high energy bills, the hurricanes and the jobs situation.

The economy lost 35,000 jobs in September, the first decline in two years, mostly reflecting damage from Hurricane Katrina. The unemployment rate climbed to 5.1 percent, from a four-year low of 4.9 percent in August.

Even with the pain of job losses and other economic fallout, Federal Reserve Chairman Alan Greenspan and his colleagues in September said Katrina doesn’t pose a “persistent threat” to the country’s economic health.

Economists are predicting the Fed will boost short-term rates by one-quarter percentage point at its next meeting, on Nov. 1, in an effort to prevent inflation from becoming a danger. That would mark the 12th increase of that size since June 2004.