Oct. 30 (Bloomberg) -- The U.S. economy expanded at a 7.2 percent annual rate from July through September, the fastest in almost two decades, powered by surges in consumer spending and corporate equipment purchases.
The increase in gross domestic product, the value of all goods and services, was the largest since the first quarter of 1984 and more than double the 3.3 percent rise in the prior three months, the Commerce Department said in Washington. For the first time, GDP exceeded $11 trillion before adjustments for inflation.
``There's nothing but good news here,'' said Laurence H. Meyer, a former Federal Reserve governor and visiting scholar at the Center for Strategic and International Studies. ``There was broad-based strength in final demand, and a key component that people had been worried about -- business fixed investment -- was very, very strong. The economy has turned the corner.''
Americans spent at the fastest pace in six years, using a windfall from lower income taxes and a record wave of mortgage refinancing to buy discounted automobiles and other merchandise.
``Our business has only gotten better each month since'' President George W. Bush signed the tax-cut bill into law in July, said Michael Anthony, chief executive officer of Brookstone Inc., in an interview. ``The tax reductions that have taken place are a terrific stimulus to the economy.'' Brookstone is a Nashua, New Hampshire-based specialty retailer.
Third-quarter profits rose an average 22 percent for the 375 members of the Standard & Poor's 500 stock index that have reported so far. International Business Machines Corp. Chief Executive Officer Sam Palmisano said Armonk, New York-based IBM will add 10,000 workers next year because information-technology spending is increasing and the economy has ``stabilized.''
Jobless Claims Fall
First-time jobless claims declined by 5,000 last week to 386,000, suggesting companies are retaining workers as the economy strengthens, the Labor Department said today.
The GDP results exceeded the 6 percent forecast, based on the median of 74 forecasts in a Bloomberg News survey. Of the economists surveyed, five had forecast growth of 7 percent or more. U.S. Treasuries fell for a third day in four.
``We are on the right track, but we've got work to do,'' Bush told workers at Central Aluminum Co. in Columbus, Ohio. ``We can't expect economic growth numbers like this every quarter.''
The growth was the fastest since Ronald Reagan was president in early 1984, when the economy was surging after the end of a recession in 1982. Reagan had also won tax cuts, in 1981.
The Federal Reserve this week held its benchmark interest rate at 1 percent, a 45-year low, in an effort to promote growth.
Market Reaction
The benchmark 10-year note fell 12/32 point, pushing its yield up 5 basis points to 4.34 percent at 4:56 p.m. The Dow Jones Industrial Average rose 12 points, or 0.1 percent.
The economy is forecast to slow to a 3.8 percent growth rate in the fourth quarter, based on a Bloomberg New Survey earlier this month. The economy grew at an average 3.6 percent rate during the record expansion from 1991 to 2001.
Surging sales and a decline in stockpiles ``point to an even greater need to replace inventories over the next few quarters and that should help sustain the economic recovery,'' said Jade Zelnik, who as chief economist at RBS Greenwich Capital in Greenwich, Connecticut, had forecast third-quarter growth of 7.5 percent. ``That bolsters the likelihood of a pickup in jobs over the next few months,'' she said.
Excluding the biggest decrease in inventories since the fourth quarter 2001, the economy was even stronger. Real final sales, which exclude the effects of inventory changes, rose at a 7.8 percent rate, the fastest since the second quarter of 1978.
Fourth-Quarter
History shows that each time real growth has reached 7.8 percent since 1947, the growth rate slows by an average of about a fifth the next quarter, said Joseph LaVorgna, senior U.S. economist for Deutsche Bank Securities Inc. If that holds true, the fourth-quarter's rate may reach 5.7 percent, he said.
Adjusted for inflation, GDP totaled $9.797 trillion at an annual rate. Unadjusted for the change in prices, GDP rose at a 9 percent annual rate to $11.038 trillion, the fastest rate since 1990's first quarter. The price deflator used to adjust the figures rose at a 1.7 percent annual rate during the quarter.
Gross domestic product grew 3.3 percent from the same quarter last year compared with a 2.5 percent year-over-year gain in the second quarter.
Consumer spending, which accounts for more than two-thirds of the economy, grew at a 6.6 percent pace last quarter, the most since the third quarter 1997, and compares with a 3.8 percent rate in the previous three months. Purchases have been on the rise since the first quarter of 1992, a record-breaking string of 47 straight quarterly increases.
Consumers, Companies
Households received an estimated $26 billion dollar boost in the third quarter from the government, according to research by economists at UBS Securities. The tax-cut plan that took effect in July was worth $12 billion during the period and the Treasury mailed out $14 billion worth of advanced refund checks to households with dependent children in late July and early August.
Business investment in equipment and software rose at a 15.4 percent annual pace, the fastest since the first quarter of 2000, following an 8.3 percent gain in the previous three months. Spending on construction of new factories and other buildings fell at a 2.4 percent annual rate. Total corporate spending rose at an 11.1 percent annual pace.
American businesses sold $23.8 billion more goods and services abroad last quarter and bought $300 million more items from foreign producers. That led to a $23.5 billion improvement in the trade balance, which contributed 0.84 percentage point to growth. A deterioration in trade subtracted 1.3 percentage points from growth in the second quarter.
Depleted Inventories
The surge in demand depleted inventories. Stockpiles fell at a $35.8 billion annual rate, following a $17.6 billion drop in the second quarter, subtracting 0.67 percentage point from growth.
Government spending increased at a 1.3 percent annual rate, slower than the 8.5 percent pace in the previous three months.
The surge in consumer spending was led by a 26.9 percent annualized increase in purchases of automobiles and other durable goods. Spending on non-durable goods rose 7.9 percent and purchases of services rose 2.2 percent.
``We've been waiting for the recovery -- it's starting to happen and that's great,'' Craig Barrett, CEO of Intel Corp., the world's biggest semiconductor maker, said in a televised interview with Bloomberg in Berlin.
Other executives said they have yet to experience a pickup in demand. ``We are not seeing anything like a boom time,'' said Joseph Galli, CEO of plastic-container company Newell Rubbermaid Inc. ``We are assuming the economy will remain soft for the balance of this year and all through 2004.''
Corporate Profits
The increase in quarterly profits for the S&P 500 companies is the fastest since the second quarter of 2000, according to Thomson Financial. Third-quarter revenue is up 7.5 percent for the S&P 500 companies that have reported.
The personal consumption expenditures price index, a measure of inflation watched by Federal Reserve Chairman Alan Greenspan and other policy makers and tied to spending, rose at a 2.4 percent annual pace following a 0.8 percent gain in the second quarter. Excluding food and energy, the PCE index rose 1.8 percent at an annual rate.
Fed policy makers voted unanimously this week to keep the target for the benchmark overnight bank lending rate at a 45-year low of 1 percent. The central bankers said the risk of ``undesirably'' low price increases is a ``predominant concern for the foreseeable future.'' They said they can keep the target rate low ``for a considerable period.''
