- The Washington Times - Thursday, October 30, 2003

Growth exploded at a 7.2 percent rate during the summer quarter, the strongest in nearly two decades, with the economy firing on all cylinders for the first time since the recession.

The Commerce Department reported that American consumers, fueled by a $100 billion infusion from tax rebates, increased their purchases of cars and other big-ticket items at a 27 percent annual rate — and they were not alone in the spending binge.

Businesses, also taking advantage of generous tax cuts, spent at double-digit rates on nearly everything from computers to SUVs, while housing construction soared by 20 percent and exports surged by 9.3 percent, helped by a weaker dollar that makes U.S. goods more attractive to international buyers.

“We must give credit where credit is due,” said Richard Yamarone, economist with Argus Research Corp., attributing the growth surge to both President Bush’s tax cuts and the Federal Reserve’s lenient interest-rate policies, which spurred spending on interest-sensitive items such as cars and houses.

“Consumers felt wealthier as they received fatter paychecks and rang the cash registers at a dazzling 6.6 percent annualized pace — the strongest in six years,” he said. “This report indicates just how powerful monetary and fiscal policy can be when implemented properly. … It’s truly a policy-maker’s dream.”

Although many economists had predicted the strong performance by consumers, Mr. Yamarone said the 11 percent increase in spending by businesses on computers, cars and other equipment came as a surprise. The quadrupling of the tax write-off Congress gave small businesses for such purchases, from $25,000 to $100,000, seems to provide the explanation, he said.

Mr. Bush took credit for the summer boom, though he cautioned that the torrid rate of growth is likely to simmer down to more sustainable levels. The summer rate was more than twice the second quarter’s 3.3 percent rate.

“The tax relief we passed is working. We left more money in the hands of the American people, and the American people are moving this economy forward,” Mr. Bush told workers at an aluminum factory in Ohio. But he added, “we cannot expect economic growth numbers like this every quarter.”

About the only sector that did not contribute to growth during the quarter was defense, where spending took a pause after skyrocketing by 45 percent during the spring quarter.

The summer spending binge also drew down inventories, subtracting from growth, but economists said that will only force businesses to purchase and produce more goods, contributing to growth in future quarters.

The one ingredient missing in one of the best quarters in memory was job growth. The Labor Department has reported separately that jobs were lost during all but the last month of the quarter — September.

But signs emerged yesterday that the job market might be on the verge of improvement. First-time claims for jobless benefits declined to 386,000 last week and stayed for the fourth straight week under the critical 400,000 level associated with stability in the job market.

Economists say the kick-start that the economy got in the summer quarter from tax cuts and low interest rates — mortgage rates touched a 40-year low in June — should generate the momentum needed to convince companies that they must hire new workers to take on the increase in demand that they are experiencing.

Mickey Levy, chief economist with Banc of America Securities, said the soft job market remains the “glaring weakness” in an otherwise robust economy. But he said that historically, there is a close link between job growth and economic growth, so he expects to see a pick-up in jobs starting in the current quarter.

Job growth has been postponed longer than usual in this recovery because productivity gains — the amount produced by each worker — have been unusually strong, enabling businesses to make do with their existing work force, he said.

The higher levels of productivity are likely to continue, thanks to the efficiencies created by computers and other technologies being widely adopted by businesses and consumers, so it might take higher rates of growth in the future to generate employment increases, he said.

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