Originally created 11/27/02

Economy grows at brisk 4 percent pace in third quarter



WASHINGTON -- The U.S. economy, stuck in low gear in the spring, lurched ahead at a brisk 4 percent annual rate in the summer, a stronger performance than the government previously thought.

The latest reading on gross domestic product, considered the best barometer of the nation's economic health, showed the economy growing at a faster pace in the third quarter than the 3.1 percent growth rate first estimated a month ago, the Commerce Department reported Tuesday.

GDP measures the total value of goods and services produced within the United States. The revised reading, based on more complete data, also exceeded analysts' expectations. They were forecasting a 3.8 percent growth rate in the third quarter.

Stronger inventory building by businesses, more robust spending by the government and an improved trade picture were the major reasons behind the upward boost to third quarter GDP.

In a more forward looking report, consumer confidence rose in November, reversing a five-month-long trend, thanks to improved expectations about employment and income, the Conference Board said. The group's Consumer Confidence Index rose to 84.1 from a revised 79.6 in October. Analysts had been expecting a reading of 85.0.

Separately, new-home sales fell by 4.5 percent in October from the previous month to a seasonally adjusted annual rate of 1.01 million, the department said in another report.

Even with the decline, October's sales pace marked the third best monthly level on record. Sales fell sharply in the Northeast and the Midwest, but they went up in the South and the West.

Economists expected sales to slow from September's all-time high monthly sales pace of 1.05 million, which represented a 1.6 percent increase from the previous month, and was powered by low mortgage rates.

The latest batch of economic news failed to cheer Wall Street. The Dow Jones industrial average was off 140 points and the Nasdaq had lost 20 in morning trading.

The economy's more than respectable speed registered in the third quarter contrasted with the below-par 1.3 percent growth rate seen in the second quarter of this year and marked the best performance since a 5 percent pace posted in the first three months of this year.

But economists worry that the summer's burst of speed could be followed by a winter lull.

Even with the third-quarter rebound, many economists predict the economy - pounded by the turbulent stock market and worries about a possible war with Iraq - is losing momentum in the current October-December quarter.

Some analysts are forecasting a fourth-quarter economic growth rate of around just more than 1 percent. Forecasters at the National Association for Business Economics said Tuesday that they trimmed their forecast for economic growth in the current quarter to a rate of 1.4 percent, down from a 2.7 percent rate estimated just two months ago.

Still, most don't foresee the economy falling back into recession.

NABE forecasters also cut their forecast for economic growth in the first quarter of 2003 to just a 2.5 percent rate, compared with a 3.3 percent growth rate.

The uneven economic growth seen so far this year is a source of apprehension for the Federal Reserve and President Bush, whose economics team is pondering what more can be done to help energize the economy, which is struggling to get back to full health after being knocked down by last year's recession.

The Federal Reserve - wanting to boost economic growth - cut a key interest rate this month by a bold half a percentage point to a 41-year low of 1.25 percent. That marked the first rate reduction this year and the 12th since January 2001.

In the third-quarter, businesses replenished stockpiles of unsold goods, adding 0.5 percentage point to GDP, a big factor in the upward revision to the overall GDP figure. The government had previously estimated that inventories had subtracted from economic growth.

Another factor in the stronger third-quarter GDP showing: Government spending grew at a 3.1 percent pace in the third quarter, more brisk than the 1.8 percent previously estimated.

An improved trade picture also helped out as exports grew at a 3.3 percent pace in the third quarter, compared with the 2.1 percent growth rate estimated a month ago.

Consumer spending, which accounts for two-thirds of all economic activity in the United States, grew at a rate of 4.1 percent in the third quarter. That was slightly slower than the 4.2 percent pace first estimated but much stronger than the 1.8 percent rate posted in the second quarter.

Consumers have been the main force keeping the economy going this year.

Business investment in equipment and software grew at a 6.6 percent rate in the third quarter, twice as fast as in the second quarter, providing an encouraging sign. A sustained turnaround in capital investment is a necessary ingredient for the economy's full recovery. But businesses continued to cut investment in new plants, offices and other buildings in the third quarter.

Tuesday's report also showed that after-tax profits of U.S. corporations grew at a 2.1 percent rate in the third quarter, up from a 1.7 percent pace in the second quarter. Economists say businesses are more likely to ramp-up capital investment once profits - which took a hit during the recession - recover.