- The Washington Times - Wednesday, December 21, 2005

ASSOCIATED PRESS

The U.S. economy grew at its fastest pace in 1 years in the summer as booming auto sales offset the adverse effects of Hurricanes Katrina and Rita. But the year is expected to end with much slower growth.

The Commerce Department reported yesterday that the gross domestic product (GDP), the broadest measure of economic health, grew at a 4.1 percent annual rate from July through September.

That was down from a 4.3 percent estimate made a month ago, but it was still the fastest pace since early 2004. The gain was even more remarkable considering that the country was hit by devastating hurricanes and gasoline prices that topped $3 per gallon.

“The bottom line is that we had a very strong quarter of growth,” said David Wyss, chief economist at Standard & Poor’s in New York.

Mr. Wyss said he thought the hurricanes had shaved about a half-percentage point from growth in the third quarter, having less of an impact than economists originally had feared.

The Bush administration, which has been trying to highlight the economy’s strengths as a way to bolster the president’s approval ratings, said the 4.1 percent GDP growth rate was evidence of a vibrant economy.

“The economy demonstrated its resilience in the last several months,” said Commerce Secretary Carlos Gutierrez.

Analysts think growth has slowed substantially in the current quarter to between 3 percent and 3.5 percent, reflecting slower increases in consumer spending. The slowdown includes a slump in auto sales reflecting falling popularity for some sport utility vehicles because of their higher fuel costs.

Asha Bangalore, an economist at Northern Trust Co. in Chicago, forecast that consumer spending would slow significantly to a growth rate of just 0.5 percent in the current quarter. Consumer spending accounts for two-thirds of the total economic activity.

While rebuilding in the hurricane areas will offset some of the slowdown in consumer demand, analysts do not expect that stimulus to be felt until next year, given the delays in reconstruction efforts.

Nigel Gault, an economist at Global Insight, a private forecasting firm in Lexington, Mass., said that in addition to the drop-off in consumer spending, the economy will be held back by a surging trade deficit, which has reached record levels in recent months.

“Robust industrial production growth suggests inventories are being rebuilt, which will dampen any slowdown,” he said.

An inflation gauge tied to the GDP rose at a rate of 3.7 percent in the third quarter, the fastest pace in more than a year and up from a 3.3 percent rate of increase in the second quarter.

However, excluding food and energy, the GDP inflation measure was up a more moderate 1.4 percent, the slowest increase in almost two years. Prices by this inflation measure had been estimated to have increased by an even lower 1.2 percent a month ago.

Some analysts said the slight upward revision in inflation would keep the Federal Reserve tightening interest rates with at least two more moves forecast in January and March.

“It is never a happy day for the Fed when GDP is revised down and inflation is revised up,” said Stephen Stanley, chief economist at RBS Greenwich Capital.

The economy originally had been estimated to have grown at a 3.8 percent rate in the third quarter, a figure that was revised to 4.3 percent last month and now revised down to 4.1 percent.

The latest downward revisions reflected slightly lower estimates in several categories, including consumer spending, business investment and housing construction.

The GDP report also showed that the profits of U.S. companies from current production fell by $54.4 billion in the third quarter compared with an increase of $59.3 billion in the second quarter.

Profits were cut by $165.3 billion at an annual rate from the estimated impacts of Katrina and Rita, which required higher payouts by domestic insurance companies and also depressed profits at companies hit with uninsured losses.

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