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GDP growth weaker than expected
Third-quarter increase of 3.7% above prior quarter but below Wall Street forecasts.
October 29, 2004: 5:55 PM EDT
Yuval Rosenberg, CNN/Money contributing writer

NEW YORK (CNN/Money) - The economy grew at an annual rate of 3.7 percent in the third quarter, the government reported Friday, up from the prior quarter but well below forecasts on Wall Street.

Growth in gross domestic product (GDP), the broadest and perhaps best indicator of the nation's economic health, accelerated from the 3.3 percent rate in the second quarter, the Commerce Department said. But the reading fell short of economists' average forecast of 4.3 percent for the quarter.

Growth was helped by strong consumer spending, while inflation remained tame. A slower buildup in inventories by businesses and the trade deficit were a drag on growth.

"The headline number was weaker than what people expected," said Jay Bryson, an economist at Wachovia Securities. "But when you look down into the underlying details, it's not as weak as what that headline number would suggest."

The report was the last broad reading on economic growth before the Nov. 2 election, and could provide ammunition for both President Bush and Democratic challenger Sen. John Kerry in the heated last days of the presidential campaign.

"We are encouraged by the ongoing strong performance of the American economy," Treasury Secretary John Snow said in a prepared statement. The GDP growth rate is above the average rate of the 1970s, 1980s and '90s, he noted.

The Kerry camp responded by pointing to the disappointing headline GDP number as a sign that Bush's economic policies have failed to deliver robust growth and new jobs.

"In the last three months, the economic performance was disappointing for middle-class families and below expectations -- the results that have become the norm for the economy under President Bush," Kerry economic adviser Gene Sperling said in a press release.

In its report, the Commerce Department said consumer spending, which fuels two-thirds of the world's largest economy, grew more briskly than it has in a year, helped by strong auto sales that were boosted by incentives, as well as sales of gasoline during the summer driving season.

Overall, consumer spending grew at a 4.6 percent rate in the quarter, more than double the 1.6 percent rate in the second quarter. Spending on cars and other big-ticket items jumped 16.8 percent versus a 0.3 percent decline the prior quarter.

"That's a pretty solid performance for a quarter that was probably affected by hurricanes," said Vincent Malanga, president of LaSalle Economics in New York.

The so-called chain deflator, a measure of inflation, rose at a 1.3 percent rate, down from 3.2 percent and below the 1.6 percent economists had expected.

"Inflation remains very low, very well contained, so most of the growth is real growth," said Malanga.

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Businesses also increased spending, boosting outlays for equipment and software about as much as in the previous quarter.

But companies scaled back their investments in building inventories. Private businesses increased inventories $48.1 billion in the third quarter, following an increase of $61.1 billion in the second quarter.

"That sliced off about a half a percentage point in growth," said Bryson.

The trade deficit also sapped some strength from the economy since imports grew faster than exports.

Exports of goods and services increased 5.1 percent while imports grew 7.7 percent. Both exports and imports grew at a slower rate than in the second quarter.

Growth in government spending, meanwhile, also slowed to a 1.4 percent rate in the third quarter, down from a 2.2 percent increase in the prior quarter.

The GDP reading is sure to factor into the Federal Reserve policymakers' coming decision on interest rates. The Fed is widely expected to increase its target rate for overnight loans between banks by a quarter of a percentage point at its Nov. 10 meeting. The third-quarter GDP figure is unlikely to change that.

But some economists say that the central bank might hold off on further rate hikes.

"There's a possibility they may decide to skip [hiking rates at] the February meeting," said Sung Won Sohn, chief economic officer of Wells Fargo Banks. "There is really no urgency because of the sluggish economy and the low inflation rate."

Sohn suggested the Fed may decide to wait until the March 22 meeting of its Federal Open Market Committee before raising rates again.

Even before today's GDP report fell short of expectations, many economists had been forecasting that the economy would slow in coming quarters as high energy prices and other concerns take their toll.

"That's about as good as it gets for the next six months," said Ken Goldstein, an economist with The Conference Board in New York. "We're about to downshift at least one gear, especially with respect to the job market."  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.