Third-quarter growth cut, still best since 2004

12/21/2005

Wednesday December 21, 9:08 AM EST
By Glenn Somerville

WASHINGTON (Reuters) - The U.S. economy grew a bit less robustly in the third quarter than previously thought and prices picked up, the government said on Wednesday, though the pace of growth remained the strongest since the beginning of 2004.

Gross domestic product, or total output within U.S. borders, expanded at a 4.1 percent annual rate in the July-September quarter, the Commerce Department said in its final estimate of growth for the period.

The rate was below the 4.3 percent the department had estimated a month ago, partly because new-car sales were slower than thought. Wall Street analysts had forecast no revision in the third-quarter growth rate.

Nonetheless, the revised rate was still the best quarterly GDP showing since a 4.3 percent pace of growth in the first three months of 2004, underlining the generally strong state of the economy’s health. Many analysts anticipate at least a temporary moderation in growth during the fourth quarter and there were hints of that in the third-quarter report.

Bond prices came under slight pressure after the data as investors focused on an upward revision to a key price index.

Price pressures picked up slightly from the initial estimate a month ago, the report showed. The price index for consumer spending rose at a 3.7 percent rate in the third quarter instead of 3.6 percent, ahead of the second quarter’s 3.3 percent.

The core personal consumption expenditures price index, which strips out volatile food and energy costs and is the Federal Reserve’s favored inflation gauge, rose at a 1.4 percent rate, an upward revision from 1.2 percent but down from 1.7 percent in the second quarter.

The core rate implies little problem with inflation, although the Fed has indicated concern that a higher level of energy prices and tighter labor markets keeps the potential for a flare-up in inflation alive.

The U.S. central bank has raised short-term interest rates 13 straight times since June 2004, bringing its trendsetting federal funds rate to 4.25 percent. Most analysts expect one or two more rises at least as policy-makers aim to bring rates back to more normal levels after cutting them to a 46-year low 1 percent.

Economist Elisabeth Denison of Dresdner Kleinwort Wasserstein in New York said the GDP report will draw attention to the possibility of consumers becoming reluctant to spend, especially coming amid the holiday shopping season.

“The big theme in the fourth quarter is going to be consumption spending, that is the real driver,” Denison said. “We started weak with the car sales in September and October declining, so that will be something to watch, and now the retail holiday season in full swing...that will be the theme.”

Consumer spending that fuels about two-thirds of national economic activity advanced at a 4.1 percent annual rate instead of 4.2 percent estimated a month ago, though that still was well ahead of the second quarter’s 3.4 percent.

Investment in new-home building increased at a 7.3 percent annual rate instead of 8.4 percent estimated a month ago, well below the second quarter’s 10.8 percent rate of growth.

Corporate profits suffered during the third quarter, falling 4.3 percent after taxes in part because insurance companies were hit with big payouts after hurricanes Katrina and Rita. Profits in the second quarter rose at a 5.3 percent rate.

The Commerce Department said the hurricanes that lashed the U.S. Gulf Coast region in August and September cut third-quarter profits before taxes and adjustments by $165.3 billion, measured at an annual rate. Not only did insurers have to make huge benefits payments but there also were losses of uninsured corporate property.