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U.S. economic rebound gains as GDP soars 7.2%
( 2003-10-31 11:09) (Agencies)

Accelerating from a jog to a sprint, the economy surged from July through September at the fastest pace in nearly two decades. Both consumers and businesses helped power the gains, fresh evidence the national rebound is on firmer footing.

The broadest measure of the economy's performance, gross domestic product (GDP), grew at a breakneck 7.2 percent annual rate during those three months, more than double the 3.3 percent rate in the previous quarter, the Commerce Department reported Thursday.

"Consumers were buying everything from cars and clothes to homes, and businesses are seemingly coming out of their cocoon," said Mark Zandi, chief economist at Economy.com.

Economists said that near rock-bottom short-term interest rates, along with President Bush's third round of tax cuts, induced consumers and businesses to spend and invest more and helped the economy move at a faster clip during the summer. The next challenge is making sure the rebound is self-sustaining, they said.

On Wall Street, concerns about the rebound's sustainability weighed on investors. The Dow Jones industrials closed up 12.08 points at 9,786.61.

"Job growth is the key to a sustained economic expansion," said Bill Cheney, chief economist at John Hancock. "If people are worried about their jobs, or worse, if they are getting laid off, then consumer spending is at risk."

The nation's payrolls grew by 57,000 in September the first increase in eight months. But analysts have said the economy needs to add a lot more jobs than that each month to drive down the 6.1 percent unemployment rate.

The Bush administration contends that as economic growth improves, meaningful job creation will follow. Bush will be counting on that as he faces re-election in 2004.

"The tax relief we passed is working," Bush said, citing the latest GDP showing. "We left more money in the hands of the American people, and the American people are moving this economy forward."

The president cautioned against expecting "economic growth numbers like this every quarter. Yet by continuing a pro-growth agenda, we will sustain growth and job creation in this country."

He added: "We're on the right track, but we've got work to do."

Democrats argue that the president's policies and tax cuts have done little to spur significant job growth, have contributed to a record budget deficit in the recently ended fiscal year and will hurt the economy over time if deficits put pressure on long-term borrowing rates.

"It is a little like a drunk going on a binge," said Sen. Kent Conrad, D-N.D. "It feels good for a while but you all know that the hangover is coming."

The 7.2 percent growth rate in GDP, the measure of the value of all goods and services produced in the United States, was the best since the first quarter of 1984.

Economists believe the economy will grow at a slower but still healthy 4 percent rate in October-December period as some of the stimulus provided by the tax cuts fades.

"The U.S. slowdown is over, dead, gone, defunct, finished and unlikely to return soon," said Sherry Cooper, chief economist with BMO Nesbitt Burns.

In other encouraging economic news from the Labor Department, new claims for unemployment benefits last week dropped by 5,000 to 386,000, a sign that layoffs are slowing. U.S. workers' wages and benefits rose 1 percent in the third quarter, compared with 0.9 percent from April through June.

In the GDP report, consumer spending surged by 6.6 percent rate in the third quarter, compared with 3.8 percent in the previous quarter.

While consumers have been the main force keeping the economy going, there are more signs that businesses are starting to do their part.

Especially encouraging was the 15.4 percent growth rate in spending by businesses on equipment and software in the third quarter, the largest increase since the first three months of 2000.

"For the first time in this recovery, consumers and businesses are joining forces," said Sung Won Sohn, Wells Fargo's chief economist.

Sustained turnarounds in capital spending and in hiring are crucial to ensuring that the economic resurgence moves ahead. Economists said business wants profits to improve and is looking for certainty about the recovery's vigor before going on a spending and hiring spree.

The housing market, powered by low mortgage rates, also contributed to the strong showing on third quarter GDP. Investment on residential projects grew at a 20.4 percent rate, the fastest since the second quarter of 1996.

Federal spending, which grew at a 1.4 percent rate, was only a minor contributor to GDP in the third quarter. Spending on national defense was flat. But in the second quarter, military spending on the Iraq war which grew at a 45.8 percent rate helped to drive economic growth.

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