Washington, Dec. 20 (Bloomberg) -- The U.S. economy grew at a 4 percent annual rate from July through September, driven by consumer spending that Federal Reserve Chairman Alan Greenspan said is carrying the recovery. The increase in gross domestic product, the total value of all goods and services produced in the U.S., matched the Commerce Department's Nov. 26 estimate and was faster than the 1.3 percent second-quarter pace. Consumer spending accounted for three-fourths of the period's growth rate. That may not be enough to sustain the expansion through 2003. Business spending is ``the indispensable spur to a path of increased economy growth,'' Greenspan said last night.
``The consumer has been moving the economy forward but if we don't get the pick up in investment we won't get the income needed to keep consumption going,'' said Laurence Meyer, a former Fed governor who's now an independent economic consultant. Concerns about war with Iraq, terrorist attacks, and the outlook for profits are hurting business confidence and delaying investment spending, St. Louis Federal Reserve Bank President William Poole said in a speech today. ``The timing of the transition to higher growth remains unclear,'' Poole said, echoing Greenspan's remarks to the New York Economists Club. Business fixed investment, which includes spending on commercial construction as well as equipment and software, fell at a 0.8 percent annual rate in the third quarter, compared with the previously reported 0.7 percent drop, today's Commerce Department report said.
Spending May Fall
Adjusted for inflation, GDP totaled $9.486 trillion in the July-August period when measured at an annual rate. In the second quarter, GDP totaled $9.392 trillion. While the report showed consumer spending grew at a 4.2 percent annual pace last quarter, that's likely to drop to a 1.1 percent annual pace in the last three months of 2002, the slowest in almost a decade, according to the Blue Chip Economic Indicators December survey. The third quarter rise was led by a surge in spending on cars and other durable goods. In October, auto sales fell 27 percent for the biggest monthly percentage drop in 11 years, led by Ford Motor Co. and General Motors Corp. And retailers such as Wal-Mart Stores Inc. and Federated Department Stores Inc. have reported holiday sales near the lower end of expectations. The economy is still ``working its way through a soft patch,'' Greenspan said, with little hiring, manufacturing slumping, oil prices higher, and overseas economies struggling.
That led central bankers to reduce the overnight bank lending rate, the U.S. benchmark, by a half-percentage point to 1.25 percent on Nov. 6, ``as some insurance that the weakening would gain some footing,'' the Fed chairman said.
Optimistic Outlook
Stocks rose and bonds fell as investors bet the rate cuts will work and corporate profits will pick up. The Dow Jones Industrial Average rose 147 points, or 1.8 percent, to close at 8512.01. The 4 percent 10-year Treasury note maturing in 2012 fell 1/8, pushing up its yield 3 basis points to 4 percent. After-tax corporate profits rose 2.1 percent in the third quarter, the Commerce Department report said. After-tax profits with capital consumption adjustments and inventory valuation fell 1.8 percent. Greenspan and Poole offered some reason for optimism about profits ahead. The Fed chairman noted that ``low interest rates and rapid' advances in productivity have been providing considerable support to economic activity,'' while Poole said the stock markets' gains over the past month or so show that ``some uncertainty has been whittled away.''
Fundamentally Sound
If concerns about Iraq and terrorism can be allayed, companies will start spending and the expansion will pick up, he said. ``The economy is fundamentally sound.'' Growth will be 2.8 percent next year, according to the consensus estimate of economists surveyed by both Blue Chip and Bloomberg News. Company investment in software and equipment increased at a 6.7 percent annual rate, compared with a 3.3 percent gain in the second quarter. Businesses added inventories at an $18.8 billion annual pace in the third quarter, compared with last month's estimate of $15.5 billion. The restocking accounted for more than half a percentage point of growth during the three months. Stockpiles increased by just $4.9 billion in the second quarter. Real final sales, which exclude inventories, rose 3.4 percent at an annual rate compared with the 3.5 percent estimated last month and the 0.1 percent drop of the prior three months.
Government spending rose at a 2.9 percent annual pace last quarter, less than the previous estimate of a 3.1 percent rate of increase. In the second quarter, government spending grew at a 1.4 percent rate. Increases in government spending will probably support the economy in coming months as the nation combats terrorism and prepares for a possible war with Iraq. In October, President George W. Bush signed into law a $37.5 billion increase in defense spending, the biggest gain since fiscal 1982. Inflation remained tame. The GDP price deflator, a gauge of inflation tied to the report, rose at a 1 percent annual rate in the third quarter after rising 1.2 percent from April to June. //www.quote.bloomberg.com