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U.S. Economy Expands at Its Fastest Pace Since 1984

October 31, 2003|Peter G. Gosselin | Times Staff Writer

In the most powerful quarterly expansion in nearly two decades, the U.S. economy raced ahead at a 7.2% annual rate from July through September, driven by consumer spending and a long-awaited burst of the corporate investment seen as needed to keep the recovery on a steady course.

Growth of the gross domestic product -- which measures the nation's total output of goods and services -- was stronger than the 6% predicted by most economists, more than twice the 3.3% pace of the preceding three months and the best quarterly performance since early 1984, when Ronald Reagan was preparing to run for reelection.

The political effect of the latest figures from the Commerce Department was immediately apparent. President Bush and senior administration officials dropped their usual caution about the economy to assert that a recovery was well underway and to claim that the report vindicated the White House strategy of deep tax cuts. Democrats noted that growth had yet to boost hiring and argued that in any event it was not the product of administration action.

"The tax relief we passed is working," Bush told a Columbus, Ohio, audience. "We left more money in the hands of the American people, and the American people are moving this economy forward."

Shot back Democratic presidential candidate Howard Dean: "President Bush has compiled the worst economic record since the Great Depression, and it is going to take a lot more than one quarter of growth to clean it up."

Perhaps the single most encouraging element in the report was evidence that corporate America, whose cutbacks helped precipitate the recent recession, was finally beginning to invest and expand again. Overall business investment increased at an 11.1% pace in the July-September quarter, up from 7.3% in the April-June quarter. Purchases of equipment and software climbed at an even steeper 15.4% rate. Economists have said for several years that firms must return to investing for a recovery to become self-sustaining.

"Business is finally coming out of its cocoon, and not just with tech spending but across the board," said Gerald D. Cohen, a senior economist with Merrill Lynch & Co. "This is just what we were looking for."

Thursday's numbers suggest the country could be in for a burst of additional growth because the new investment was accompanied by a further cutback in corporate inventories. Inventory reduction sliced two-thirds of a percentage point from the latest quarterly growth rate and almost three-fourths of a point from the previous quarter's, the Commerce Department said. The reductions have driven the ratio of companies' inventories to their sales to a four-decade low, leaving them with little in their warehouses to sell and therefore with a need to resume production.

The numbers even show that trade -- normally a drag on growth as Americans buy more imports than they sell exports -- actually contributed to growth in the latest quarter. Exports of goods and services grew at a 9.3% rate during the three-month quarter while imports barely budged. By contrast, exports in the previous quarter shrank while imports ballooned.

Investment and trade growth was supplemented by another blast from American consumers, who picked up their already blistering pace of purchases, especially of such costly, debt- financed items as houses, cars, furniture and appliances.

For all of the good news, the report gave few hints about when growth would begin translating into new jobs -- something that most, although not all, economists believe must happen for the recovery to endure.

Analysts pointed to a separate report Thursday that showed initial claims for unemployment benefits falling by 5,000 to 386,000 last week, the fourth straight week the number has remained below 400,000. But the same report showed that continuing claims for benefits, which had been declining, jumped by 60,000 to 3.57 million.

Some analysts took heart from an announcement by IBM Corp. Chief Executive Sam Palmisano that the New York-based computer giant would add 10,000 workers next year because information technology spending was rising and the economy had "stabilized." Others wondered how an economy that grew at such a spectacular pace during the last three months could have lost 41,000 jobs at the same time. Employers reduced payrolls by 98,000 in July and August before adding 57,000 in September, according to the Labor Department.

"If we don't start adding jobs soon, we're going to be as disappointed in the economy next year as we are excited about it today," said Mark Zandi, chief economist of forecasting firm

Perhaps concerned about the economy's longer-term prospects, Wall Street showed little reaction to the GDP report, as key indexes closed mixed. The Dow Jones industrial average rose 12.08 points to 9,786.61. The Nasdaq composite index fell 3.87 points to 1,932.69.

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