Economy Grows at Brisk 3.8 Percent in Third Quarter

WASHINGTON – Economic activity expanded at an energetic 3.8 percent annual rate in the third quarter, providing vivid evidence of the economy's stamina even as it coped with the destructive forces of hurricanes Katrina (search) and Rita.

The latest snapshot of the country's economic performance, released by the Commerce Department (search) on Friday, even marked an improvement from the solid 3.3 percent pace of growth registered in the second quarter.

Growth in the third quarter was broad-based, reflecting brisk spending by consumers, businesses and government.

The expansion in gross domestic product in the July-to-September quarter, the strongest since the beginning of the year, also exceeded many analysts' expectations. Before the report was released, they were forecasting the economy to clock in at a 3.6 percent annual rate.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the nation's economic fitness.

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 essential oil and gas facilities, catapulting energy prices higher and fanning inflation fears.

An inflation gauge tied to the GDP report showed overall inflation picking up in the third quarter. But excluding food and energy prices, "core" inflation — something the Federal Reserve (search) pays close attention to — actually moderated. Core inflation rose at a rate of 1.3 percent in the third quarter, down from a 1.7 percent pace in the second quarter.

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

Consumers' boosted spending at a brisk 3.9 percent rate, the strongest pace since the end of last year. That spending reflected a big appetite for big-ticket "durable" goods, such as cars, which had been discounted and promoted to lure buyers. Some analysts believe consumer spending probably will moderate, but still remain healthy, in the months ahead.

Businesses increased spending on equipment and software at an 8.9 percent pace in the third quarter, on top of a 10.9 percent growth rate in the prior quarter.

Spending by the federal government, which analysts believe included some outlays due to the hurricanes, rose at a 7.7 percent rate in the third quarter, the fastest pace since the first quarter of 2004.