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U.S. Economy Expanded at a 4.3% Pace in Third Quarter (Update2)

U.S. Economy Expanded at a 4.3% Pace in Third Quarter (Update2)

Nov. 30 (Bloomberg) -- The U.S. economy grew at a 4.3 percent annual rate from July through September, the quickest since the first quarter of last year and evidence of resilience in the face of record energy costs.

The revised figure for gross domestic product, the value of all goods and services produced in the U.S., was higher than economists forecast and compares with a 3.8 percent pace initially estimated, the Commerce Department's figures showed today. Growth was 3.3 percent in the prior three months.

A second straight quarter of declining inventories will keep factories humming, providing fuel for an economy that's grown in excess of 3 percent since March 2003, the longest such streak since 1986. Consumer spending, construction and business investment were more robust than the government first estimated.

``The economy is booming,'' said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. Englund correctly forecast third-quarter growth. ``As much as people may have been concerned about gas prices, consumers took the hit and now gas prices are falling.''

Stocks rose after the report showed a growing economy with tame inflation. A measure of inflation watched by Federal Reserve policy makers rose at the slowest pace since the second quarter of 2003. The Standard & Poor's 500 Index rose 1.7 points, or 0.1 percent, at 9:48 a.m. in New York.

Growth in the U.S. has exceeded a 3 percent rate for 10 straight quarters, the longest such string since the 13 quarters that ended in March 1986.

`Good News'

Treasury Secretary John Snow heralded the report as ``very good news for American workers and those looking for jobs,'' even as a recent poll showed many Americans still perceive the economy as weak. A survey released Nov. 28 by the Manchester, New Hampshire-based American Research Group found that 43 percent of those questioned said the economy was in a recession, while 44 percent said it wasn't.

The economy probably created 210,000 jobs in November and the unemployment rate likely held at 5 percent, according to a survey of economists before a Labor Department report Dec. 2.

Economists forecast a 4 percent gain in GDP last quarter, according to the median estimate of 67 estimates in a Bloomberg News survey. Estimates ranged from 3.3 percent to 4.4 percent.

The wrath of Hurricane Katrina, which struck the Gulf Coast on Aug. 29, took a toll on corporate profits during the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, or profits from current production, fell $45.5 billion, or 3.4 percent, compared with a 4.6 percent gain in the second quarter.

Corporate Profits

Profits were reduced by $151.2 billion at an annual rate in the third quarter because of an increase in payouts by insurance companies and uninsured losses of corporate property due to hurricanes.

Adding this amount back in, corporate profits would have increased almost 8 percent, according to economists at Bear, Stearns & Co. and MFR Inc.

``Underlying corporate profitability remained quite strong in the third quarter even as the effects of the hurricanes hit the headline numbers,'' said Joshua Shapiro, chief U.S. economist at MFR in New York.

The government's personal consumption expenditures price index, a measure of prices tied to consumer spending, rose 3.6 percent, compared with a 3.7 percent rise reported last month and a 3.3 percent second-quarter gain.

Confidence and Orders

The index excluding food and energy, a measure favored by Fed policy makers, rose at a 1.2 percent annual rate. The government reported a 1.3 percent third-quarter rise last month, and a second-quarter increase of 1.7 percent.

Reports yesterday showing higher consumer confidence, new home sales and durable goods orders supported forecasts that central bankers will keep raising interest rates to ensure inflation doesn't accelerate.

GDP rose to $11.2 trillion when annualized and adjusted for inflation. Without adjustment, the economy grew at a 7.4 percent annual pace to $12.6 trillion for the quarter.

Business inventories fell at a $13.4 billion annual rate, compared with a $16.6 billion pace of reduction previously reported and a $1.7 billion rate of decrease in the prior quarter. Inventories subtracted 0.44 percentage points from growth in the third quarter.

Corporate Spending

Corporate spending will probably help power the economy this quarter and next year, economists said. Economists at Morgan Stanley yesterday boosted their forecast for economic growth this quarter to a 3.8 percent annual rate from 3.1 percent after the durable goods report showed an increase in sales of business equipment and a rise in inventories.

Current-production cash flow, or the internal funds available to companies for investment, rose 2.7 percent in the third quarter compared with 3.4 percent in the second quarter.

Business fixed investment, which includes spending on commercial construction as well as on equipment and software, rose at an 8.8 percent annual rate for a second straight quarter. The government estimated last month that such investment rose at a 6.2 percent pace.

Spending on equipment and software rose at a 10.8 percent annual rate, compared with the 8.9 percent previously reported.

Consumers

Residential construction rose at an 8.4 percent annual rate in the third quarter, compared with 4.8 estimated last month and a 10.8 percent gain in the second three months of the year.

Consumer spending, which accounts for about 70 percent of the economy, expanded at a 4.2 percent annual pace, compared with 3.9 percent estimated in October and a 3.4 percent pace for the second quarter. The median estimate in a Bloomberg survey of economists was 3.9 percent.

The data ``suggest there was a bit more spending momentum at the end of the quarter than previously thought,'' according to an e-mail from economists at Nomura Securities International Inc. Depending on tomorrow's release of October spending figures, ``these data may lead us to raise our forecast of fourth-quarter growth, which we currently peg at 2.5 percent.''

The gain in consumer spending was paced by auto sales in July, which rose at the second-fastest pace on record after Ford Motor Co. and DaimlerChrysler AG's Chrysler unit matched General Motors Corp.'s offer to extend employee discounts to all buyers. Vehicle purchases sagged in August and September.

Holiday Sales

The revised figures showed consumers spent more on non- durable goods and services in the second quarter than the government first reported.

Wal-Mart Stores Inc., the world's largest retailer, expects a ``very good'' holiday sales season, helped by an expanded selection of electronics and the new Metro 7 apparel line, Vice Chairman John Menzer said Nov. 28. Wal-Mart is based in Bentonville, Arkansas.

The retail price of gallon of regular unleaded gasoline reached $3.069 the week ended Sept. 5, according to figures from the Energy Department. Pump prices have since fallen 30 percent.

A bigger trade gap restrained growth in the quarter. The gap subtracted 0.25 percentage points to GDP. In the initial estimate, the government reported that trade added 0.8 percentage point to economic growth.

To contact the reporter on this story:
Joe Richter in Washington at [e-mail]


LINK: http://quote.bloomberg.com/apps/news?pid=10000006&sid=a.JzqKD54p7g&refer=home