Posted on: Saturday, October 30, 2004

Auto sales fuel growth in GDP

By Martin Crutsinger
Associated Press

WASHINGTON — The economy grew at an annual rate of 3.7 percent in the summer as a big rebound in auto sales offset weakness from an exploding trade deficit, soaring oil prices and the Florida hurricanes, the government reported yesterday.

The July-to-September increase in the gross domestic product — the country's total output of goods and services — was up slightly from a 3.3 percent GDP growth rate in the spring, but it was well below the 4.3 percent rate many economists had been forecasting.

The weaker-than-expected third-quarter result raised new worries over the threats posed to the economy from rising energy prices, lackluster job growth and overextended consumers.

"This is less than a stellar number," said Mark Zandi, chief economist at Economy.com. "The economy is not growing fast enough to create significant new jobs and bring the unemployment rate down."

Wall Street closed the week at 10,027.47, gaining 22.93 points yesterday to cap four days of consecutive gains, the first time the Dow has managed that since mid-August.

The campaigns of President Bush and challenger John Kerry both sought to use the last major economic indicator before Election Day to score political points.

Treasury Secretary John Snow, Bush's chief economic spokesman, said the administration was "encouraged by the ongoing strong performance of the American economy," with GDP expanding above the average growth rate of the past decade.

But Gene Sperling, who was chief White House economic adviser during the Clinton administration and is now advising Kerry, called the GDP performance "disappointing for middle-class families and below expectations."

After racing ahead at a 4.5 percent rate in the first three months of this year, GDP growth slowed to a 3.3 percent rate in the second quarter. The slowdown, which Federal Reserve Chairman Alan Greenspan termed a "soft patch," reflected a sharp retrenchment by consumers, who pulled back on their purchases in the face of rising energy bills.

For the third quarter, consumer spending climbed to a 4.6 percent rate of increase, the best growth in a year, up from an anemic 1.6 percent rate in the second quarter.

The rebound was led by a 16.8 percent surge in purchases of big-ticket durable goods as consumers, lured by new dealer incentives, went on an auto buying spree. Those purchases contributed nearly a full percentage point to third-quarter growth.

That helped offset a widening of the U.S. trade deficit, which lowered GDP growth by about two-thirds of a percentage point in the third quarter.

Other factors restraining growth were a slowdown in business inventory stocking and the hurricanes that battered Florida and other states, depressing construction activity, analysts said.

The 3.7 percent GDP growth rate in the third quarter is likely to be followed by a similar growth rate in the final three months of this year, analysts said. However, they worried that this forecast could turn out to be too optimistic if rising energy prices continue to rattle business and consumer confidence.

The University of Michigan's consumer confidence index dipped to 91.7 in October, down from 94.2 in September, it was reported yesterday, a drop blamed on rising energy prices and worries about the sluggish pace of job growth. Payroll growth has been disappointing for a number of months.

In a third report, the Labor Department said employee wage and benefit costs rose 0.9 percent in the July-to-September quarter, identical to the April-to-June increase.

The increase in wages and salaries in the third quarter was 0.7 percent, the fastest rate in a year, while the costs of health insurance and other benefits, which have been soaring, rose by just 1.1 percent, the slowest increase in more than two years.

Economists said the GDP needs to grow at better than 3.5 percent to keep the unemployment rate — currently at 5.4 percent — headed lower. While they are predicting around 3.7 percent growth in the current quarter, they worry about the adverse impacts rising energy prices and falling consumer confidence might have on that forecast.