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GDP 3Q growth surges
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November 24, 1999: 2:25 p.m. ET
Economy at stronger-than-expected 5.5% pace; inflation measure up
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - The U.S. economy expanded at a furious pace in the third quarter, faster than initially projected, as demand at home and abroad for U.S.-made goods remained strong and businesses invested more in stocking up their shelves, the government said Wednesday.
Gross domestic product, which measures all the goods, services and investment the economy generates, rose at a 5.5 percent annual pace in the third quarter, the Commerce Department reported. That's above the 5 percent rate economists had expected and the 4.8 percent initially reported last month.
The GDP price deflator, a widely watched measure of inflation, gained a revised 1.1 percent in the July-September period, up from the 0.9 percent pace initially reported by the Commerce Department last month. Analysts had expected the GDP deflator to remain at 0.9 percent.
"What we are seeing here is incredibly strong growth and benign inflation," said Tim Rogers, chief U.S. economist with Thompson Global Markets in Boston. "A 1.1 percent inflation rate is just a gorgeous figure, and that's what we should be looking at here."
Corporate inventories growing
Indeed, the numbers offered an even clearer picture of strong growth and minimal inflation -- two distinct features of the economy that have reinforced themselves in recent months. Even so, investors sold bonds on concern that above-5-percent growth could generate faster inflation down the road.
The Commerce Department said the upward revision in growth was mainly due to larger-than-expected increases in corporate inventories -- a reflection of U.S. companies' efforts to keep up with the brisk pace of consumer demand.
Consumer spending, which accounts for more than two-thirds of the U.S. economy, rose by 4.6 percent in the third quarter, higher than the 4.3 percent pace initially reported though less than the 5.1 percent pace registered in the second quarter. Inventories rose $33.9 billion, up from the $28.1 billion initially reported.
Click here for the Commerce Department's breakdown of third-quarter GDP
The economy's growth spurt was accompanied by a strong rise in corporate profits. Driven by a sharp gain in overseas earnings -- which was helped by improving economies abroad -- third-quarter profit after taxes rose 3 percent to an annual rate of $598.6 billion.
At the same time, a good portion of those profits was reinvested in operations, the report showed. Spending on business equipment and software rose 18.2 percent in the third quarter, previously reported as a 21.7 percent rise.
Watching spending carefully
Spending on equipment and software is a category that economists watch closely to gauge whether companies are expanding their operations.
The government didn't revise Americans' personal savings rate -- savings as a percentage of disposable income -- which stood at 2.1 percent in the third quarter, an all-time low.
Trade, too, helped fuel the economy in the third quarter. The U.S. trade deficit shaved 0.65 percentage point off third-quarter growth, better than the previous quarter when the deficit reduced growth by 1.35 percentage points.
Exports jumped 11.7 percent in the third quarter, compared with 4 percent in the second quarter. Imports also grew faster, rising 14.6 percent from 14.4 percent in the second quarter.
Waiting for a slowdown
Commerce releases three estimates of each quarter's GDP as more information becomes available to its analysts. The final estimate will be published Dec. 22.
All told, the revisions reinforced the view among some analysts that the Federal Reserve's decision to raise short-term interest rates a little more than a week ago was justified, even though consumer prices have yet to accelerate. The Fed has lifted its benchmark fed funds rate three times this year, in quarter-point increments that have raised the rate to 5.5 percent from 4.75 percent.
Are bonds retracing their steps?
"The question the Fed now faces is what will happen to growth looking forward in the wake of a 75-basis-point tightening?" said Ian Shepherdson, chief U.S. economist with High Frequency Economics in Valhalla, N.Y.
For bond investors, the answer was clear. The benchmark 30-year Treasury bond slid almost half a point as investors concluded that the economy is growing at a potentially inflationary pace, even without firm evidence of rising prices.
Taken in stride
To be sure, the stronger-than-expected pace of the economy -- the fastest quarterly performance since a 5.9 percent surge in the final quarter of 1998 -- was taken in stride by analysts who foresee the economy slowing in the final quarter of the year and into 2000.
"We still expect economic activity to slow over the next several quarters as consumer spending slows further and housing declines more because of higher interest rates and energy costs," said Steven Wood, an economist at Banc of America Securities in San Francisco. "The absence of inflation will be welcomed at the Federal Reserve."
Few analysts anticipate the Fed will be making any adjustments to monetary policy at its Dec. 21 meeting -- four days before Christmas and 11 before the turn of the century and the big Y2K test. The next Fed meeting after that is Feb. 2.
Separately, the Labor Department said the number of individuals filing first-time jobless claims fell by 13,000 to 274,000 in the week ended Nov. 20, a continued sign of a tight labor market.
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Commerce Department
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