Economy gains momentum

WASHINGTON — The economy headed into the end of the year with good momentum, expanding at an annual rate of 4 percent in the third quarter, a faster clip than previously thought.

The new reading on the gross domestic product, released Wednesday by the Commerce Department, exceeded the previous estimate of a 3.9 percent growth rate for the July-to-September quarter. It marked the best showing since the opening quarter of this year and was up from a 3.3 percent pace in the second quarter.

“Things are shaping up,” said Carl Tannenbaum, chief economist at LaSalle Bank.

Gross domestic product measures the value of all goods and services produced within the United States and is the broadest barometer of the country’s economic health.

Brisk spending by consumers and businesses helped the economy expand nicely in the third quarter. The slight upward revision to GDP in the third quarter mostly reflected the fact that the trade deficit was less of a drag on the economy than previously forecast.

“The magnitude of the adjustment was trivial, but the handle change may provide a psychological boost,” said Steve Stanley, chief economist at RBS Greenwich Capital.

On Wall Street, the report helped lift the Dow Jones industrials to a new, 3 1/2 -year high. The Dow rose 56.46 to close at 10,815.89.

Analysts are hopeful the current October-to-December quarter will log a solid performance, with some estimates anywhere from a 3.5 percent growth rate to as high as a 4.5 percent pace. Still, analysts are closely monitoring holiday retail sales, which thus far have failed to shine.

For all of 2004, the economy is expected to grow by more than 4 percent, which would mark an improvement from 2003, when GDP rose by 3 percent. However, economists foresee slower — but still healthy— economic growth for 2005.

The latest snapshot of the economy comes as President Bush lays the groundwork for his second-term economic agenda. The centerpieces are overhauling Social Security and the nation’s tax system — tall orders from both an economic and political standpoint, analysts say.

The new, third-quarter GDP figure, based on more data, was better than economists were forecasting. They were predicting economic growth would remain at the 3.9 percent pace estimated a month ago.

After adjusting for inflation, the economy grew to $10.9 trillion, on an annualized basis, in the third quarter.

In the third quarter, consumers ratcheted up spending at a 5.1 percent rate, the fastest pace since the end of 2001. Consumer spending accounts for roughly two-thirds of all economic activity. Thus their behavior is an important factor in determining the strength of the economy.

Businesses, meanwhile, boosted their investment in equipment and software at a sizable 17.5 percent pace — slightly better than previously thought — and the fastest pace since the third quarter of 2003.

The trade deficit in the third quarter ended up shaving a tiny 0.10 percentage point from GDP, an improvement from the 0.27 percentage-point reduction previously estimated for the quarter.

Encouraged by the economy’s performance, Federal Reserve policy-makers earlier this month boosted short-term interest rates by one-quarter percentage point to 2.25 percent, the fifth rate increase this year. The Fed meets next in early February, and economists think rates probably will go up again then.

While the economic recovery has been moving along solidly, the labor market recovery has been somewhat uneven. Employers, keeping a close eye on their bottom lines, added 112,000 jobs in November, down from 303,000 in October.

One measure of after-tax profits in the GDP report showed profits shrank by 4.2 percent in the third quarter from the previous quarter. Analysts say profits were restrained by a string of hurricanes that ripped through the Southeast, high energy prices and slower productivity growth. But profits are up 5.7 percent from the third quarter a year ago.