U.S. Third-Quarter Gross Domestic Product Grew at a 7.2% Rate
Oct. 30 (Bloomberg) -- The U.S. economy expanded at a 7.2 percent annual rate from July through September, the fastest in almost two decades, powered by surges in consumer spending and corporate equipment purchases, a government report showed.

The increase in gross domestic product, the value of all goods and services produced, was the largest since the first quarter 1984 and more than double the 3.3 percent rise in the prior three months, the Commerce Department said in Washington.

Americans spent at the fastest pace in six years, using the windfall from lower income taxes and a record wave of refinancing to buy discounted automobiles and other merchandise. Such demand has spurred earnings at companies like Rohm & Haas Co., giving them the wherewithal to invest in equipment and hire, making for a sounder economic expansion.

``The consumer has been strong for a while, but it now looks like the worst is over'' for business investment, said James O'Sullivan, an economist at UBS Securities LLC in New York, before the report. Rising profits ``are a positive force for investment in the next couple of quarters and increasing confidence will trigger more hiring.''

Excluding the biggest decrease in inventories since the fourth quarter 2001, the economy was even stronger. Real final sales, which exclude the effects of inventory changes, rose at a 7.8 percent rate, the fastest since the second quarter of 1978.

Economists had forecast a 6 percent gain in third-quarter GDP, based on the median of 73 forecasts in a Bloomberg News survey. Adjusted for inflation, GDP totaled $9.797 trillion at an annual rate. Unadjusted for the change in prices, it breached the $11 trillion mark for the first time, reaching $11.038 trillion, and rose at a 9 percent annual rate. The price deflator used to adjust the figures rose at a 1.7 percent annual rate during the quarter.

Year-Over-Year

Gross domestic product grew 3.3 percent from the same quarter last year compared with a 2.5 percent year-over-year gain in the second quarter.

``We are beginning to see an improvement in the overall economic environment,'' Raj L. Gupta, chief executive officer of Rohm & Haas, said yesterday in a statement. Consumer purchases ``remain strong'' and ``there is some indication of a positive turn'' in business spending, he said.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a 6.6 percent pace last quarter, the most since the third quarter 1997, and compares with a 3.8 percent rate in the previous three months. Purchases have been on the rise since the first quarter of 1992, a record-breaking string of 47 straight quarterly increases.

$26 Billion

Households received an estimated $26 billion dollar boost in the third quarter from the government, according to research by economists at UBS Securities. The tax-cut plan that took effect in July was worth $12 billion during the period and the Treasury mailed out $14 billion worth of advanced refund checks to households with dependant children in late July and early August.

Business investment in equipment and software rose at a 15.4 percent annual pace, the fastest since the first quarter of 2000, following an 8.3 percent gain in the previous three months. Spending on construction of new factories and other buildings fell at a 2.4 percent annual rate. Total corporate spending rose at an 11.1 percent annual pace.

American businesses sold $23.8 billion more goods and services abroad last quarter and bought $300 million more items from foreign producers. That led to a $23.5 billion improvement in the trade balance, which contributed 0.84 percentage point to growth. A deterioration in trade subtracted 1.3 percentage points from growth in the second quarter.

The surge in demand depleted inventories. Stockpiles fell at a $35.8 billion annual rate, following a $17.6 billion drop in the second quarter, subtracting 0.67 percentage point from growth.

Automobiles

Government spending increased at a 1.3 percent annual rate, slower than the 8.5 percent pace in the previous three months.

The surge in consumer spending was led by a 26.9 percent annualized increase in purchases of automobiles and other durable goods. Spending on non-durable goods rose 7.9 percent and purchases of services rose 2.2 percent.

``It's been a real good year for us, and will continue into next year,'' said Timothy Manganello, chief executive of BorgWarner Inc. in a television interview with Bloomberg News on Monday.

BorgWarner, the world's largest maker of components for automatic transmissions, said third-quarter earnings rose 13 percent as demand for engine and four-wheel-drive systems increased. Sales grew 6 percent and Manganello said the company expects fourth-quarter earnings to rise to $1.65 to $1.75 a share compared with $1.52 in the year-earlier period.

Corporate Profits

Profits for the 373 members of the S&P 500 that have reported quarterly results as of yesterday rose 20.5 percent, on average, according to Thomson Financial. That's the fastest pace since the second quarter of 2000. Of those companies, 65.6 percent exceeded the average estimate. Third-quarter revenue is up 7.5 percent for the S&P 500 companies that have reported, according to Thomson Financial.

Philadelphia-based Rohm & Hass, the maker of Morton Salt and chemicals used in road paint, said that third-quarter profit rose 37 percent as sales increased 9.7 percent.

``We expect the economy to continue to recover in 2004,'' said William Zollars, chief executive of Yellow Corp. in an interview Friday. ``It will be a comprehensive recovery.''

Yellow, which is buying Roadway Corp. in a combination of the two largest U.S. trucking companies, said last week that third-quarter profit more than doubled as sales increased 13 percent.

Production

The drop in inventories will help the economy maintain some of its momentum this quarter even as consumer spending is expected to slow, said economist such as Richard Berner, chief U.S. economist at Morgan Stanley in New York.

``Producers, scared by the long period of slow growth and recession, have been extremely cautious,'' said Berner. That ``almost guarantees some catch-up now,'' he said. ``Even with a slower spending pace, the prospects for solid, sustainable growth are actually much better than at any point in the past four years.''

The economy is forecast to grow at a 3.8 percent annual pace this quarter and in the first six months of 2004, according to the median estimate of 58 economists surveyed by Bloomberg News this month. The economy grew at an average 3.6 percent rate during the record expansion from 1991 to 2001.

The personal consumption expenditures price index, a measure of inflation watched by Federal Reserve Chairman Alan Greenspan and other policy makers and tied to spending, rose at a 2.4 percent annual pace following a 0.8 percent gain in the second quarter. Excluding food and energy, the PCE index rose 1.8 percent at an annual rate.

Fed policy makers voted unanimously this week to keep the target for the benchmark overnight bank lending rate at a 45-year low of 1 percent. The central bankers said the risk of ``undesirably'' low price increases is a ``predominant concern for the foreseeable future.'' They said they can keep the target rate low ``for a considerable period.''