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Jump in GDP Comes With Warning

Other reports on jobless claims, employment costs and manufacturing output point to a weakening economy.

November 01, 2002|Glenn Somerville | Reuters

WASHINGTON -- U.S. economic growth spurted ahead in the third quarter, powered by brisk consumer spending, the government said Thursday. But analysts warned that slowing sales of cars and other goods have already sapped much of the momentum.

Indeed, three other reports Thursday pointed to a weakening economy, boosting the odds of another interest-rate cut when Federal Reserve policymakers meet Wednesday.

In the government's first estimate of third-quarter growth, the Commerce Department said gross domestic product, which measures the total value of goods and services produced within U.S. borders, advanced at a 3.1% annual rate in the three months from July to September. That was a rebound from the anemic 1.3% pace of the second quarter.

Analysts said the report, while showing the economy still was growing, highlighted the uneven pace of recovery from last year's recession and left a clear path for further Fed rate cuts -- even with the central bank's benchmark short-term rate already at a 40-year low of 1.75%.

The government's report acknowledged that much of the third-quarter advance came from brisk spending on new cars and trucks, as automakers offered a variety of incentives, including free financing, to lure buyers to showrooms.

The report showed consumer spending overall grew at a 4.2% annual rate in the quarter, up from a 1.8% rate in the second quarter.

But car sales slowed in October and may be harder to revive in coming months, some experts warned.

"The economy is losing steam," economist Sung Won Sohn of Wells Fargo Bank in Minneapolis said. "The zero-percent financing is like antibiotics; the market needs a stronger and bigger fix to maintain the current level of sales."

Commerce Secretary Don Evans said that a number of influences were depressing consumers' spirits, from anger over corporate accounting scandals to worry about the effect of possible war with Iraq.

Separately Thursday, a Labor Department report showed initial claims for unemployment benefits jumped by 16,000 to 410,000 in the week ended Oct. 26, indicating a weakening job market.

In a third report, the Labor Department said its employment cost index -- measuring what employers pay in wages, salaries and benefits -- rose at a 0.8% rate during the third quarter, slowing from 1% in the second quarter.

Meanwhile, a report on Chicago-area manufacturing showed that activity contracted for a second consecutive month in October, and at a faster pace than expected.

There were some signs in the GDP report that suggested businesses might be starting to modestly raise investment spending -- something economists say is vital to keep some economic momentum going.

Nonresidential private investment -- spending on factories and equipment -- edged ahead for the first time in two years. Within that category, spending on equipment and software increased for a second straight quarter during July-September, rising at its fastest pace since 2000's second quarter.

But a survey issued Thursday by the National Assn. for Business Economics said the 108 businesses it polled did not expect to boost hiring in coming months, and many were cutting their spending plans.

NABE's president, Tim O'Neill, said it was not an entirely bleak view of the future but it indicated caution: "There is a somewhat more pessimistic view about where the economy is going in the near-term, but there's no sense of panic."

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