The reading on gross domestic product (GDP) for the
July-to-September quarter — the last broad snapshot of economic activity before
Election Day — followed a 3.3 percent growth rate in the prior quarter, the
Commerce Department reported Friday.
Analysts were predicting that the economy, which Federal
Reserve Chairman Alan Greenspan had said hit a "soft patch" in the
late spring, would gain traction and expand at a more brisk 4.3 percent rate in
the third quarter.
GDP measures the value of all goods and services produced within the United
States and is considered the broadest barometer of the economy's health.
"The economy right now is running in the middle lane. We're not in the fast
lane but we're not on the shoulder or in the break down lane," said Richard
Yamarone, economist with Argus Research Corp.
Although the third quarter's performance fell short of analysts'
expectations, it still marked the best growth seen since the first three months
of this year.
Consumers — the lifeblood of the economy — snapped out of a funk in the third
quarter and boosted spending at the fastest pace in a year. Businesses also
increased spending on equipment and software, but they didn't invest as
aggressively on building inventories — a factor that restrained economic growth
in the third quarter. The bloated trade deficit also weighed on economic
activity.
President Bush and his Democratic rival, John Kerry, have divergent views
about how the economy and the nation's job market are faring. Bush says his tax
cuts helped the economy rebound from the 2001 recession and fostered payroll
growth. Kerry contends that the tax cuts mainly helped the wealthy and thrust
the government's balance sheets deeper in red ink.
Analysts said the GDP report provides political ammunition for both camps.
In other economic news, employers saw costs for workers' wages and benefits
grow by 0.9 percent in the third quarter, the same increase posted in the second
quarter, the Labor Department said.
Even though the economy is expanding, the recovery in the job market has been
uneven — a situation that has frustrated job seekers. Employers have added more
than a million jobs in the past year, but since Bush took office in January
2001, the economy has lost a net 821,000 jobs.
The Federal Reserve, meanwhile, probably will boost short-term interest rates
for a fourth time this year when its meet next on Nov. 10. With the economy out
of crisis mode, Fed policy-makers want to continue to move rates from
extraordinarily low levels to more normal levels to make sure that inflation
doesn't become a threat to the economy down the road.
An inflation gauge tied to the GDP report and closely watched by Fed
policy-makers showed that prices — excluding food and energy — rose at an annual
rate of 0.7 percent in the third quarter, down from 1.7 percent rate of increase
in the previous quarter.
From an economic point of view, inflation is still under control even through
oil prices have been surging. Oil prices, which recently hit new record
territory of just more than $55 a barrel, moderated on Thursday to $50.92 a
barrel.
High energy prices pose a risk to the economy — especially if they cause
consumers and businesses to become extremely cautious and cut back on spending
and investment, analysts say. Economists believe that the impact of soaring
energy prices could slow economic activity in the final quarter of this year.
In the third quarter, though, consumers seemed to be in the mood to treat
themselves despite high energy prices. They increased spending at a 4.6 percent
rate, up from a lackluster 1.6 percent pace in the prior quarter and the biggest
increase since the third quarter of 2003.
Spending on big-ticket goods such as automobiles led the way. Consumer
spending on such items went up at a whopping 16.8 percent pace in the third
quarter, compared with a 0.3 percent rate of decline in the second quarter.
Business investment on equipment and software rose at a 14.9 percent rate in
the third quarter, up from a 14.2 percent growth rate in the second quarter.
However, less aggressive spending on inventories by businesses ended up
shaving 0.48 percentage point from third quarter GDP. The trade deficit reduced
third-quarter GDP by 0.62 percentage point. Those were the two main factors
tempering economic growth in the third quarter.
Government spending, meanwhile, increased at a 1.4 percent rate in the third
quarter, down from a 2.2 percent growth rate in the prior
quarter.
