Indicators pointing toward accelerated economic growth

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WASHINGTON — Fueled by a surge in consumer spending, the U.S. economy took off in the July-September period, with growth running perhaps as high as a 7 percent annual rate, a number of economists said yesterday.

Such predictions got a boost from a Commerce Department report that retail sales grew at a 12.2 percent annual rate in the third quarter, despite a 0.2 percent decline last month. Some analysts said the federal personal income tax cut that took effect July 1 was partially responsible for the jump in spending.

"You give consumers a tax cut and they'll spend it," said Ken Mayland of ClearView Economics in Cleveland. "That's the way America works."

However, several forecasters also expect the impact of the tax cut on spending to fade, with economic growth dropping back to a still solid 4 percent annual rate or so for the remainder of this year and through 2004. And some economists caution that such sustained growth will depend on steady gains in business investment, which appear likely but not certain.

Ray Stone, of Stone & McCarthy, a financial markets research firm, said that consumer spending for both goods and services likely rose at about a 6.25 percent annual rate in the third quarter, after adjustment for inflation. On the same inflation-adjusted basis, the gross domestic product increased "at around a 7 percent (annual) pace," Stone said.

Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y., went further. The retail sales report "pushes our estimate for third-quarter economic growth to 7.5 percent," Shepherdson said.

Job growth is the key

Such strong growth, more than double the 3.3 percent annualized growth rate of the previous quarter, would be the fastest pace since before the 2001 recession and likely set the stage for the creation of new jobs, the analysts said.

Mayland said he is optimistic that a sustainable expansion is now under way. Aside from the tax cut, wages are increasing faster than prices, home values and stock prices are rising, all of which leave consumers well positioned to keep spending.

"Job growth, which is on the cusp of occurring, should be the icing on the cake," Mayland said. "This bodes well not just for fourth-quarter retail sales, including the crucial holiday buying season, but for 2004 sales as well."

For last month alone, retail sales except those at auto dealers rose 0.3 percent. But sales of new vehicles and parts fell 1.6 percent, dragging down overall sales by 0.2 percent, Commerce said. Both changes were roughly in line with analysts' expectations.

Meanwhile, the Federal Reserve's latest nationwide survey of economic conditions confirmed a substantial pickup in growth.

Ten of the Fed's 12 regional Reserve banks, which conduct the survey, found the pace of the economic expansion had accelerated since the previous survey released early last month.

In the Twelfth District, which includes Hawai'i and other western states, the Fed noted some pickup in economic growth, but productivity gains kept hiring at bay.

A rise in venture capital investment for the district bodes well for biotech start-ups, the report also noted. Back-to-school sales were strong as was demand for homes, though commercial real estate was sluggish. Prices for lumber and other housing materials have shot up in response to strong demand from the Iraqi rebuilding efforts.

In Hawai'i, international visitor counts have begun to rise after being battered by SARS and war, the Fed said.

Rates may rise next year

Overall, the report is consistent with other data that have painted a picture of an economy that is improving, but probably not fast enough for the Fed's policymaking Open Market Committee to raise interest rates when it meets Oct. 28.

Fed officials have vowed to hold rates at the current 45-year low of 1 percent as long as needed for the economy to reach sustained recovery. Some economists, however, suggested the economy was beginning to improve rapidly enough that the Fed could begin to raise rates early next year.

"Fed governors have highlighted the pickup in economic activity as of late, and this beige book (report) illustrates that optimism," says Brian Wesbury, chief economist of Griffin Kubik Stephens and Thompson, a Chicago investment banking firm, suggesting the Fed could move on rates in the first quarter of 2004.

The Washington Post and USA TODAY contributed to this report.