- The Washington Times - Sunday, November 3, 2002

With America's seemingly indefatigable consumers leading the way, the U.S. economy grew at a 3.1 percent annual rate during the third quarter. That was more than double the growth rate of the second quarter, but it was less than the 3.5-to-4-percent growth rate most economists expected. Moreover, a bundle of data strongly suggests that much of the growth in the July-September quarter occurred during the first half of the period. Recent economic activity appears to have downshifted to a sufficiently significant degree that the futures market is signaling that there is a good chance that the Federal Reserve's policymaking committee will lower its short-term target interest rate when it convenes on Wednesday.
On Friday, the day after the Commerce Department released its third-quarter report on gross domestic product (GDP), the Labor Department reported that the unemployment rate edged up one-tenth of a percentage point to 5.7 percent in October. Revised nonfarm payroll data for the third quarter revealed that the 3.1 percent annual growth rate in GDP generated a net increase of only 164,000 jobs over the third quarter, half of which were in the public sector.
Over the past four quarters, the economy has grown by 3 percent. (During each of the first three quarters of 2001, the economy contracted.) However, the 3-percent growth rate over that 12-month period has been insufficient to prevent nonfarm payrolls from shedding more than 900,000 jobs in that timespan.
The Labor report revealed that the unemployment rate has crept up from 5.4 percent in October 2001 to 5.7 percent last month. While still low by the standards over the past 30 years, especially when compared with this point in the business cycle, the current 5.7 percent unemployment rate is nonetheless now nearly 2 percentage points above its cyclical low of 3.9 percent achieved in October 2000.
According to the Commerce report, personal consumption expenditures, whose annual growth rate accelerated from 1.8 percent during the second quarter to 4.2 percent in the third, contributed a hefty 2.95 percent of the quarter's 3.1 percent growth rate. Moreover, the purchase of motor vehicles accounted for an astonishing $38 billion, or more than 50 percent, of the $72.8 billion in increased output between the second and third quarters. Recently, however, auto sales have significantly decelerated, leading many economists to project that fourth-quarter growth will approximate 1.5 percent.
On the bright side, final sales a crucial statistic that adjusts GDP for changes in private inventories increased 3.2 percent during the third quarter after declining in the second. In addition, for the first time in eight quarters, business investment finally registered positive growth in the third quarter, if only by 0.6 percent. On the other hand, after declining for seven consecutive quarters, the longest such streak in postwar history, business investment still remains $158 billion below its peak annual rate achieved during the third quarter of 2000.
As the third-quarter data confirm in the extreme, the modest recovery over the past 12 months remains vastly disproportionately consumer-driven. How much longer can the highly indebted, over-taxed, increasingly unconfident consumer continue to lead the way? No doubt Fed Chairman Alan Greenspan and his colleagues are asking themselves precisely that question.

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