GDP surges 7.2%, fastest in 19 years
By Rex Nutting, CBS.MarketWatch.com
Last Update: 8:40 AM ET Oct. 30, 2003
WASHINGTON (CBS.MW) -- Powered by tax cuts and low interest rates, the U.S. economy expanded at a 7.2 percent annual rate in the third quarter, the fastest growth in more than 19 years, the Commerce Department said Thursday.
The first estimate of real gross domestic product was considerably stronger than the 6 percent consensus forecast. The economy grew 3.3 percent in the second quarter.
The growth rate is a testament to the power of monetary and fiscal stimulus to boost final demand. Final sales of domestic product grew 7.8 percent, the best in 25 years. Real disposable income increased 7.2 percent. John Maynard Keynes would be proud of his disciples, Alan Greenspan and George W. Bush.
Real GDP is adjusted for price charges. In current dollars, nominal GDP increased 9 percent to $11.04 trillion.
Growth was balanced in the quarter, with strong contributions from consumers and businesses, spending and investment. Government spending and net exports also added to growth. The only negative forces were inventory accumulation and investments in business structures.
Fiscal and monetary stimulus peaked in the quarter. Tax rebate checks and lower tax withholding increased disposable incomes, while 40-low interest rates reduced borrowing costs and fueled cash-out refinancings, healthy increases in auto sales and record home sales.
The question now is how sustainable the growth is. Will job growth resume to give consumers more income to replace the boost from tax cuts and mortgage refinancings? Will capital spending keep expanding at a rapid rate? Will higher interest rates choke off the recovery? Will the weakening dollar reduce the large current account deficit and bring more production back to the United States?
Consumer spending surged ahead 6.6 percent, the best in more than five years. Led by strong auto sales, purchases of durable goods rose 26.9 percent, the best in 15 years. Spending on non-durable goods rose 7.9 percent, the best in 27 years. Spending on services increased 2.2 percent.
Consumers also increased their investments in residences by 20.4 percent, thanks to record low mortgage rates during the summer months that boosted housing starts by more than 30 percent.
Businesses did their part, as well. Investments in equipment and software rose 15.4 percent, the biggest swing in capital spending since the first quarter of 2000. It's the fifth increase in capital spending in the past six quarters following six straight quarters of declines.
Investments in business structures fell 2.4 percent, the seventh decline in the past eight quarters. In all, nonresidential investment rose 11.1 percent.
Businesses remain cautious, however. Inventories were reduced by $35.8 billion, subtracting about 0.7 percentage points from growth. Once businesses decide to replenish their stocks, production and employment should rise, economists say.
The nation continued to run a large trade deficit with foreign economies. But the gap shrank in the third quarter, so net exports added about 0.8 percentage points to growth. Exports rose 9.3 percent while imports increased 0.1 percent.
Government spending increased 1.3 percent, with equal contributions from the federal government and state and local governments. Defense spending was flat.
Inflation accelerated slightly during the quarter. The gross domestic purchases index rose at a 1.9 percent annual rate after rising 0.4 percent in the second. Energy prices accounted for much of the increase, but even the core rate accelerated to 1.5 percent from 0.8 percent. The personal consumption expenditure index rose 2.4 percent with the core PCE index up 1.8 percent.
Rex Nutting is Washington bureau chief of CBS.MarketWatch.com.
AI
