October 29, 2004
A Surprisingly Good Quarter
Do you want to see healthy economic growth, with low inflation and low unemployment rates? Then look outside your window. According to the scorekeepers at the Bureau of Economic Analysis, the U.S. economy just turned in a solid growth performance in the third quarter of the year, accelerating to a 3.7 percent annual rate of growth. That keeps the economy on track to record its third consecutive year of accelerating growth in 2004.
You can’t literally see that, of course. That’s why information from statistical reports, like the BEA’s report on Gross Domestic Product, is of crucial importance in making policy – and election day – decisions. The breadth and scope of the economy simply cannot be captured in a few news reports or personal experiences.
As the most comprehensive accounting of the national economy, the quarterly GDP report is eagerly awaited by economists and forecasters. And the third quarter’s report will make most of them heave a sigh of relief. Evidence of softness in consumer spending, which accounts for more than two thirds of the income flows in the entire economy, was dashed in a largely upbeat report.
Led by a torrid 16.8 percent increase in spending on durable goods, American consumers resumed their spendthrift ways in the July-September period after turning in a more cautious performance in the previous three months. Overall consumer spendingrose at a 4.6 percent annual rate, swinging the entire economy into faster growth in the process.
Headlines about record levels of consumer debt are meaningless without some perspective. Debt is higher because the economy is larger. But a more careful examination of total debt as a proportion of after-tax income reveals that the economy has now exceeded its last peak reached in 1986. Yet consumers continue to spend more, and save less, as the value of their assets appreciates and the costs of servicing their debt remain manageable, thanks to low interest rates.
That’s good news, because business spending is showing signs of fatigue in recent months. Although spending on computers and equipment grew at double digit rates in the third quarter once again, investment in inventories and structures was off markedly from its earlier pace. Commercial building is still stuck in a slump nationwide, with no signs yet of a revival.
Other favorable trends moderated in the third quarter as well. The slowdown in economic activity abroad eroded the growth in exports. But the 5.1 percent growth in shipments offshore still contributed a half percentage point to overall growth. On the other side of the ledger, the U.S. economy remains a spark for our major trading partners, who contributed to an acceleration in U.S. imports.
One piece of unexpectedly good news in the GDP report was on inflation. As measured by the GDP price deflator, overall prices rose at only a 1.3 percent annual rate in the third quarter. This is considerably down from the 3 percent growth rate in the first half of the year. It is apparent from the data that increases in raw materials prices, particularly energy prices, are not being propagated into the overall economy.
The third quarter GDP report solidifies the view that the U.S. economy is still successfully managing the challenges of its post-recession recovery. It also makes it virtually certain that the Federal Reserve will continue its slow increases of short term interest rates to a more normal level. The current pace of growth may not satisfy everyone, but it’s one a lot of other countries wish they could achieve.
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