WASHINGTON – U.S. economic growth was much stronger in the third quarter than first thought as consumers and businesses spent more than estimated, but corporate profits shrank as insurers were sideswiped by Gulf Coast hurricanes, a government report showed on Wednesday.
U.S. gross domestic product, a measure of all goods and services produced within U.S. borders, grew at a revised 4.3 percent annual rate in the July-to-September period, the fastest pace since the first three months of 2004, the Commerce Department said.
In its first snapshot a month ago, the department had put third-quarter growth at 3.8 and Wall Street economists had expected the rate to be revised up more modestly, to 4.0 percent. The sharp upward bump took growth a full point above the second-quarter's 3.3 percent rate.
The report offered the first look at corporate profits in the third quarter. Profits after tax fell 3.7 percent, the largest decline in four years, after a 5.3 percent rise in the second quarter. The Commerce Department said profits were reduced by $151.2 billion at an annual rate because of Hurricanes Katrina and Rita, as insurance companies made huge benefits payments and uninsured corporate property was lost.
The department also said inflation was a bit lower than first reported, with the price index for consumer spending rising at a 3.6 percent annual rate, compared with an initial 3.7 percent estimate. In addition, the core price index, which strips out volatile food and energy prices and is the Federal Reserve's favored inflation measure, moved up just 1.2 percent, down from the 1.3 percent pace originally reported.
That was the lowest rate of core inflation in more than two years. Economists had expected the price index to be revised higher, and the surprise downward revision suggests Fed policy-makers have little to be concerned about on the inflation front.
The Fed has raised short-term interest rates 12 times since mid-2004 in a bid to keep price rises in check, but many analysts suspect the rate-hike campaign is nearing an end.
The stronger-than-expected growth in the third quarter was attributed to higher spending by both businesses and consumers.
Consumer spending advanced at a robust 4.2 percent pace, above the 3.9 percent rate first reported. While growth in spending on big-ticket items was actually softer than initially thought, at a still-booming 10.5 percent pace, purchases of nondurable goods grew 3.6 percent - stronger than the 2.6 percent pace first reported.
Spending on housing, too, was stronger than initially thought. Residential fixed investment grew at an 8.4 percent pace, up from the 4.8 percent growth first reported, after a 10.8 percent growth surge in the second quarter.
Business spending was also robust. Non-residential fixed investment rose at an 8.8 percent pace, above the initially estimated 6.2 percent growth, as spending on equipment and software rose at a 10.8 percent rate, just below the second-quarter's 10.9 percent clip.
While businesses reduced inventories in the third quarter, the drawdown was not as sharp as first thought. Stocks of unsold goods dropped at a $13.4 billion annual rate, slower than the $16.6 billion pace reported a month ago. That was still the largest drop since the fourth quarter of 2001 - after the Sept 11 attacks in New York and on the Pentagon.
Overall, the report reinforced the view that the U.S. economy is on a solid footing, with tame inflation and strong consumer and business spending. Economists expect growth to slow in 2006, however, as the housing market cools slightly and consumers pull back.