Originally created 11/26/03

Economy grows at whopping 8.2 percent pace



WASHINGTON --The economy roared ahead at an astounding 8.2 percent annual rate in the third quarter, the fastest pace in nearly two decades and a much stronger performance than previously thought. It raises hope that a long spell of lackluster business activity is finally over.

The revised gross domestic product (GDP), released by the Commerce Department Tuesday, was a full percentage point higher than the 7.2 percent growth rate estimated a month ago.

The new estimate, based on more complete data, reflected stronger investment by business on new equipment and software, less severe cuts in companies' inventories and more brisk spending on residential projects.

Those were the main factors behind the upward revision to third-quarter GDP, which measures the value of all goods and services produced within the United States and is considered the broadest barometer of the country's economic health.

"I think there's a better mix of growth in this report, with capital spending being a major portion of the upward revision," said economist Ken Mayland, president of ClearView Economics. "The economy is regaining the confidence of businesses and they are stepping up to the plate and spending and investing for the future."

The 8.2 percent growth rate - more than double the 3.3 percent pace registered in the second quarter - represented the best showing since the first quarter of 1984, when the economy surged at a 9 percent pace. Economists were predicting third-quarter GDP would be revised up, with estimates ranging from a 7.3 percent pace to an 8 percent pace.

Near rock-bottom short-term interest rates and President Bush's third round of tax cuts motivated businesses and consumers to spend and invest more, helping the economy to move at such a fast clip in the third quarter, economists say. The next challenge is making sure the rebound is lasting.

The Bush administration believes the economy is poised for solid growth and stronger job creation in the months ahead. That is politically important to Bush as he heads into the 2004 campaign. Democrats, however, blame Bush for the loss of 2.3 million jobs since he took office in January 2001 and argue that the tax cuts contributed to the record 2003 budget deficit.

For out-of-work Americans, though, it probably doesn't feel like much of an economic recovery. Only recently has the battered labor market shown signs of improving. In October, the unemployment rate improved fractionally, to 6 percent, as the economy added jobs for the third straight month.

Steady improvements in job creation and in capital investment are crucial ingredients for the economic recovery to be self sustaining, economists say.

Analysts believe the economy will grow at a slower, but still healthy rate of at least 4 percent in the current October-to-December period as some of the stimulus provided by the tax cuts and a surge in mortgage refinancing fade.

Against this backdrop, Federal Reserve policy-makers are expected to hold a key short-term interest rate steady at a 45-year low of 1 percent at its next meeting on Dec. 9.

In the GDP report, consumers continued to do their part to keeping the economy going. They boosted spending in the third quarter at a 6.4 percent rate. That was up from a 3.8 pace in the second quarter, but down slightly from the 6.6 percent rate previously estimated for the third quarter.

Especially encouraging was a 18.4 percent growth rate in business investment in new equipment and software in the third quarter. That was even stronger than the 15.4 percent pace previously estimated for the quarter and up from a 8.3 percent pace in the second quarter.

Spending on residential projects grew at a whopping 22.7 percent pace in the third quarter, also better than the sizable 20.4 percent growth rate first estimated and up from a 6.6 percent pace in the second quarter.

Fewer cuts to business inventories in the third quarter resulted in a 0.16 percentage-point increase to GDP in that three-month period, compared with a 0.67 percentage-point reduction to GDP as previously estimated.

Another factor in the upward revision to GDP in the third quarter: Slightly stronger spending by state and local governments. These governmental bodies boosted spending at a 2.3 percent pace, up from a 1.3 percent growth rate previously estimated.