Economy grows at strong 3.8 percent rate in third quarter

WASHINGTON -- Hurricanes Katrina and Rita haven't blown the economy off course. Economic growth clocked in at a surprisingly strong 3.8 percent pace in the third quarter, reflecting brisk spending by consumers and businesses despite high energy prices.

The latest picture of the country's economic standing, released by the Commerce Department on Friday, showed a performance even better than the 3.3 percent growth rate from April through June.

The hurricanes' impact on the economy seems so far to be less penetrating than the immense toll on people and their livelihoods. Analysts said the economic expansion continues firmly rooted.

"The economy bulled its way forward during the summer and not even the destruction of a major city and other Gulf Coast communities could slow it down," said Joel Naroff, president of Naroff Economic Advisors.

On Wall Street, release of the gross domestic product report sparked a rally. The Dow Jones industrials soared 172.82 points to close at 10,402.77, its biggest one-day gain since April 21.

The GDP expansion from July through September topped the 3.6 percent growth rate that many analysts had forecast. GDP, which measures the value of all goods and services produced in the United States, is the best gauge of economic fitness.

Analysts said the rate might have topped 4 percent if the hurricanes had bypassed the U.S.

Despite the strong performance, many people have a grim view of the economic outlook, illustrated by a decline in consumer confidence.

Katrina, the costliest natural disaster in U.S. history, struck in late August; Rita hit in late September. Both hurricanes destroyed businesses and homes and choked the flow of trade. They also hobbled oil and gas facilities, driving energy prices higher and fanning fears of inflation.

An inflation gauge tied to the GDP report showed prices rising at a 3.7 percent rate in the third quarter, the fastest pace in just over a year.

When food and energy prices are excluded, "core" inflation -- which the Federal Reserve watches closely -- actually moderated. It rose at a rate of 1.3 percent in the third quarter, compared with 1.7 percent in the earlier three months.

A separate barometer of inflation, employers' labor costs, climbed by 0.8 percent in the third quarter, the Labor Department reported. That compared with a gain of 0.7 percent for wages and benefits in the second quarter.

Despite the sting of high energy bills, consumers kept up their spending, doing their part to keep the economy rolling in the third quarter.

The 3.9 percent growth rate, the strongest pace since the end of last year, reflected a big appetite for big-ticket durable goods, such as cars, which had been discounted and promoted to lure buyers.

Analysts expect consumer spending probably will moderate in the final three months of this year as auto sales drop off with the waning of generous incentives and energy prices cause belt-tightening.

As for businesses, their spending on equipment and software rose at an 8.9 percent pace in the third quarter, on top of a 10.9 percent growth rate during the prior three months.

Federal spending, which analysts believe included some outlays due to the hurricanes, rose at a 7.7 percent rate in the third quarter, the fastest since the January-March period in 2004.

The GDP report came out as President Bush, faced with sagging approval ratings, struggles to improve the public's confidence in his economic stewardship. Three-quarters of those surveyed rate the current economy as fair or poor, and most blame Bush, according to an AP-Ipsos poll.

Private analysts say the overall economy is actually doing better than the public's perception, which has been shaped by high energy bills, the hurricanes and the jobs situation.

The economy lost 35,000 jobs in September, the first decline in two years. The loss mostly reflected damage from Katrina.

The hurricanes reduced personal incomes by about $40 billion, on an annualized basis, in the third quarter as spending outpaced income growth. The personal savings rate -- savings as a percentage of after-tax income -- dropped to a negative 1.1 percent in the third quarter, the lowest since the government began collecting quarterly figures in 1947.

Federal Reserve Chairman Alan Greenspan and his colleagues maintained in September that Katrina did not pose a "persistent threat" to the economy's health.

Economists have varying opinions about economic growth in the October-to-December quarter -- predicting a range from 3 percent to 4 percent. A few believe growth could be around 2 percent.

With inflation still a concern, though, the Fed is expected to boost short-term rates by one-quarter of percentage point at its meeting Tuesday. If so, it would be the 12th such increase since June 2004.

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On the Net:

GDP: http://www.commerce.gov/

Employment costs: http://www.bls.gov/