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The Honolulu Advertiser
Posted on: Wednesday, December 24, 2003

Spending soars in 3rd quarter

By Sue Kirchhoff
USA Today

WASHINGTON — Consumer spending during the third quarter of the year took the biggest jump since Ronald Reagan's presidency, helping propel economic growth to a stellar 8.2 percent annual rate, the Commerce Department said yesterday.

While tax-cut-spurred spending has since slowed, it has hardly stalled. A second report showed personal income rose in November at the fastest pace since spring, while consumer spending continued to rise.

Also, inflation slowed in November, which should allow the Federal Reserve to hold off raising key interest rates from current 1 percent lows until it is sure the recovery has expanded to the still lackluster job market.

"It looks to me like the economy has turned the corner and is in a self-sustaining economic expansion. The question is, how strong is that going to be?" says Steven Wood of Insight Economics.

Wood expects growth to slow to a 5 percent annual rate through the end of the year, then settle into about a 4 percent pace.

The Commerce Department issued its third and final estimate yesterday of third-quarter gross domestic product, the broadest measure of goods and services produced in the United States. The overall pace of growth remained at 8.2 percent, the fastest clip in nearly 20 years, but the composition changed slightly.

Consumer spending jumped 6.9 percent during the quarter, up from the previous estimate of 6.4 percent and the biggest leap since the third quarter of 1986.

Business spending and profits were slightly below previous estimates, though strong enough to underscore that a long-awaited revival in business investment is under way. Business spending rose at a 12.8 percent rate in the quarter, down from a 14 percent forecast. Corporate after-tax profits jumped 10.1 percent in the quarter, below last month's 10.6 percent estimate.

The economy grew at a 3.1 percent rate in the second quarter of 2003 and by 2.2 percent in all of 2002.

"For the first time in this recovery, consumers and businesses have joined forces. For the corporate sector, demand is up, productivity gains have been spectacular, the balance sheet has been repaired and liquidity has improved," says Sung Won Sohn, chief economist at Wells Fargo, predicting economic growth of 4.6 percent moving ahead.

In a second report, the government said personal income rose 0.5 percent in November. Spending increased 0.4 percent, more slowly than forecast, but the fastest pace since August and strong enough to show that consumers haven't run out of steam, even with the end of federal tax cuts and cut-rate mortgage refinancing deals.

The Fed's preferred measure of consumer inflation, the personal consumption expenditure index, fell 0.1 percent during the month.

"The U.S. has seen a clear transfer of growth leadership from household spending to business outlays," says Sherry Cooper, chief economist for BMO Nesbitt Burns. "Rising income and consumer confidence should keep consumer spending at reasonably healthy levels."

Also yesterday, the Labor Department said large employers reported 1,438 mass layoffs — those involving 50 or more workers — in November, affecting 138,543 workers. The report is the third month of improvement and better than a year ago.

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