U.S. Economic Growth Accelerates in Turbulent Third Quarter

By Jason Simpkins
Associate Editor

A report from the Commerce Department Wednesday showed the U.S. economy is holding up well against the housing slump and credit crunch.  The economy expanded by 3.9% in the third quarter, which included a period when mortgage and borrowing costs were at six-year highs.

Analysts had only expected a growth rate of 3.1%, but consumer, business, and government spending all increased. As a result, U.S. gross domestic product (GDP) grew at its fastest rate in a year and a half.

Consumer spending rose 3% after posting a meager 1.4% increase in the second quarter. Many analysts believe the strong showing was the result of a stable job market. Job creation edged up in the month of September and wages grew. The unemployment rate swelled slightly, but even at 4.7%, it's low by historical standards.

Businesses opened up their wallets as well, increasing the amount spent on software and equipment by 5.9%. Combined with commercial construction projects, total business investment rose 7.9%. Government spending rose 3.7%.

A weak dollar played its part as well, accelerating the flow of goods and services out of the country. Exports grew by 16.2% on an annualized basis in the third quarter, the biggest increase since 2003. In turn, the increased volume of exports helped to narrow the trade gap, adding 0.9% to the rate of expansion. The gap shrank to $546.2 billion at an annual pace, the smallest since 2003.

Strong economic growth for the turbulent third quarter demonstrates a great deal of resiliency on behalf of the economy, but few expect it to carry that momentum into the remaining three months.

"I don't expect we're going to see GDP at all like this in the fourth quarter, but coming from where we've been in mid-2007, it won't be bad," Richard DeKaser chief economist at National City Corp., told Bloomberg

While Wall Street breathed a sigh of relief as the good news broke, Federal Reserve Chairman Ben Bernanke and the Federal Open Market Committee were forced to wonder whether their quarter-point rate cut was such a good idea. 

Core prices, which exclude food and energy costs, rose at a rate of 1.8% in the third quarter, a 0.4% increase from the second quarter, but still within the Fed's comfort zone of 1% to 2%.  Still, a Fed rate cut and soaring oil prices have stoked concerns about inflation.

Regardless of the drawbacks this was still excellent news for the economy. It demonstrates solid economic growth in the middle of a rocky quarter. And inflation still remained in check.

Joel Naroff, President and Chief Economist at Naroff Economic Advisors reminded investors that, "A 4.50% funds rate would still be a restrictive rate."

"Consumers spent money on everything at a decent rate, businesses invested much more strongly than thought, and firms shipped goods to the rest of the world at an extraordinary rate," Naroff said. "Put it all together and you have an economy that really was in good shape in the summer."

News and Related Stories: