- The Washington Times - Saturday, October 29, 2005

Economic growth barreled along at a 3.8 percent rate this past summer despite record-high energy prices and the most devastating storm in U.S. history, the Commerce Department reported yesterday.

Consumers led the surprisingly strong performance, which occurred mostly in the first two months of the quarter before Hurricane Katrina struck the Gulf Coast Aug. 29 and prompted a major slump in consumer confidence, the loss of more than a half-million jobs, and the destruction of many oil and gas facilities.

But to keep spending, consumers had to stretch their resources to an unprecedented extent, dipping into their savings and going deeply into debt, the figures show. Economists say a consumer pullback, reflecting a hangover from Katrina, is likely to reduce growth in the months ahead.

The evidence that the summer’s growth remained solid and even exceeded the spring’s 3.3 percent pace cheered Wall Street yesterday, sparking a 173-point jump in the Dow Jones Industrial Average to 10,403.

“The weather huffed and puffed, but it couldn’t blow the U.S. economy down,” said Avery Shenfeld of CIBC World Markets. “If storms took a percentage point or so off the economy’s pace, the 3.8 percent quarter showing for real GDP growth has to be considered strong by all accounts.”

The report also comforted Bush administration officials shaken by adverse political developments recently. Treasury Secretary John W. Snow noted the U.S. economy remains the best performer among the world’s major developed nations.

“There is little wonder why the American economy is the envy of the world,” he said. “There can be no doubt that the American economy is an adaptive and resilient marvel.”

U.S. consumers have gained a reputation for being unstoppable in recent years as they shrugged off major upheavals from terrorist attacks and corporate scandals to high oil prices and shrinking incomes.

A report from the Labor Department yesterday showed that wage growth, at 2.3 percent in the last year, was the lowest in 24 years of keeping record — yet consumers seemingly remain undeterred.

The consumer spending spree has been aided by low inflation, interest rates and tax rates, and sizable gains in the value of U.S. homes that have bolstered wealth and confidence.

Economists say the beneficial factors appear to have cushioned the shock from a series of hurricanes and soaring energy prices once again last quarter.

A 10.2 percent surge in defense spending also boosted growth, according to the Commerce Department report, while the booms in housing and exports contributed less to growth than in previous quarters.

But consumers in the two months since the hurricane struck have been signaling distress, and economists expect a more subdued performance in the fall.

Consumer sentiment fell to a 13-year low in October, according to an index published by the University of Michigan. And auto sales this month may have been the worst since 1998, analysts estimate.

“Evidence is mounting that the energy shock is taking its toll on consumers,” said Richard Berner, an economist with Morgan Stanley.

Yesterday’s report showed a $140 billion cut in discretionary income from soaring energy prices, at an annual rate last quarter, he said, while the savings rate plunged to a record low of minus 1.1 percent as consumers dipped into their savings and piled on debt to keep up their spending habits.

“There’s no mistaking the budding signs of immediate weakness in spending” in the aftermath of the storms, Mr. Berner said. Consumers no doubt are trimming spending on cars and other big-ticket items; the question is whether they have reached a “tipping point,” he said.

Most likely, the consumer retrenchment will cause spending growth to fall to an anemic 1 percent rate in the fall quarter after surging by nearly 4 percent over the summer, he said. But after that, it should stage a comeback.

While consumers face further energy shocks from record-high home heating costs starting this month, the recent drop in gasoline prices to levels that prevailed before Katrina has offset some of the impact from those bills, he said.

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