Consumers Push GDP Upward

The U.S. economy raced ahead at a 3.1 percent annual rate in the summer, powered by hearty consumer spending, especially on big-ticket items such as cars.

The rebound in third quarter gross domestic product, considered the best barometer of the nation's economic health, came after a mediocre 1.3 percent growth rate posted in the second quarter, the Commerce Department reported Thursday.

Still, "The overall figure was a little bit weaker maybe than the market expectation," said economist Brian Jones of Salomon Smith Barney, and economists worry that the growth spurt could be followed by a winter lull.

GDP measures the total value of goods and services produced within the United States.

Even with the bounce back, many economists predict the economy — pummeled by the roller coaster stock market, worries about a possible war with Iraq and eroding consumer confidence — is losing momentum in the current October-December quarter.

Some analysts are forecasting a fourth-quarter economic growth rate of around 2 percent. Others believe it will be a lot weaker at only a 1 percent pace. Still, most don't foresee the economy falling back into recession.

The economy's struggles will likely be weighing on Americans' minds as they head to the polls next week. Democrats and Republicans have sought to blame each other for the economy's troubles in their campaign strategies to win control of Congress in next week's midterm elections.

President Bush, campaigning for Republicans around the country, has credited his 10-year, $1.35 trillion, tax cut enacted by Congress last year, with helping to pull the economy out of a recession that began March 2001.

Democrats, however, point to the tax cut as a key reason why the federal government posted a $159 billion deficit in the 2002 fiscal year, ending four straight years of surpluses.

The third quarter GDP performance was the strongest since the economy posted a brisk 5 percent growth rate in the first three months of this year.

Much of the strength in third quarter GDP came from consumers. Consumer spending grew at a brisk 4.2 percent pace in the third quarter, up from a tepid 1.8 percent rate in the second quarter.

"The broad shoulder of the American consumer was like Atlas holding up the economy," said Ken Mayland, economist with ClearView Economics.

"[Friday's] personal income and spending report could show that consumer spending in inflation-adjusted terms was down about four- to five-tenths of a percent in September," Salomon Smith Barney's Jones told CBS Radio News. "The problem with that is that it's not a good base going into the fourth quarter."

Spending on "durable" goods — big ticket items, including cars — grew by a whopping 22.7 percent pace in the third quarter, a huge increase from the 2 percent pace posted in the previous quarter.

Both overall consumer spending and spending on durables in the third quarter were the strongest since the fourth quarter of last year.

Low interest rates, zero-percent financing offers and rising home values are among the factors motivating consumers to buy, helping to offset some negative forces including the turbulent stock market, sinking consumer confidence, and the sluggish job market.

"It's a labor market that continues to weaken, and I think it's continued worried about a potential military engagement with the Iraqis," said Jones.

All this year, consumers — whose spending accounts for two-thirds of all economic activity in the United States — have been carrying the economy. But economists worry that they may be losing energy, a factor in weak fourth-quarter GDP projections.

In an encouraging sign, business investment in new equipment and software grew at a brisk 6.5 percent rate in the third quarter. That was the best showing since the second quarter of 2000 and was up from a 3.3 percent pace in the second quarter.

"That is an encouraging sign we have been watching for, waiting for," said Commerce Secretary Don Evans.

Deep cuts in capital spending was a key reason the economy tipped into recession in March 2001. Economists say a sustained turnaround is a necessary ingredient for the economy to return to full health.

However, businesses continued to slash spending on new factories, office buildings and other structures at a rate of 16 percent in the third quarter, on top of a 17.6 percent rate of decline in the second quarter.

Another factor restraining third quarter GDP was slower inventory building by businesses, which are wary about the economic recovery and watched profits take a hit during the recession.

In other economic reports Thursday, new claims for unemployment benefits rose by 16,000 to 410,000 last week and U.S. workers' wages and benefits grew by 0.8 percent in the third quarter, down from a 1 percent rise in the previous quarter, the Labor Department said.

A recent Federal Reserve survey depicted an economy that was battered in September and early October by a host of problems, from a plunging stock market to the West Coast dock shutdown. That somber picture raised the odds that Fed policy-makers might reduce short-term interest rates for the first time this year on Nov. 6.

An inflation gauge tied to the GDP showed that inflation is not a problem for the economy, giving the Fed leeway to keep rates low or nudge them down even further. The gauge showed inflation grew at a 1.9 percent rate in the third quarter, down from a 2.7 percent pace in the second.

Top economic forecasters, meanwhile, are growing more pessimistic about this year's economic outlook.

The National Association for Business Economics in a quarterly poll released Thursday reported that 53 percent of forecasters surveyed said they were "somewhat more pessimistic" about the economy, up from 28 percent in its previous survey in July.