Economy puts on a surge

WASHINGTON -- The economy roared to life in the third quarter, growing at an annual rate of 7.2 percent, the fastest rate in 19 years, the Commerce Department reported yesterday.

"This is a stunning number," said Wayne Ayers, chief economist at FleetBoston Financial Corp. "You take it apart, and there is growth in every sector."

The surprisingly robust expansion was well above the 6 percent spurt most economists had expected, although it sent no clear signal about the nation's persistent joblessness. Much of the growth came from consumer spending, stimulated by parts of the Bush tax cut that had an immediate effect on household income.

The White House, under attack by Democrats for not doing enough to create new jobs, was quick to celebrate the growth in the gross domestic product, a measure of the nation's total output of goods and services. "The president's jobs and growth tax relief package helped fuel the surge in the economy in the third quarter," the Bush administration said in a statement. "It brought economic activity to a higher level, which increases incomes and living standards for American workers."

Overall consumer spending grew by 6.6 percent and accounted for two-thirds of economic growth. Spending on consumer durables, such as cars and washing machines, soared by 27 percent while spending on nondurables, such as clothing and food, rose by 7.9 percent. Low interest rates sustained the boom in home buying and building.

Although the tax cut that took effect in July has a $350 billion price tag, only $26 billion of the cut found its way into consumer pockets in the last quarter, according to a UBS Securities study cited by Bloomberg. That stimulus included $14 billion in advance refund checks mailed to families with dependent children.

The manufacturing sector, particularly hard hit during the economic slump, also showed encouraging signs of recovery. Investment in equipment and software by nondefense related companies grew at a 15.4 percent annual pace following an 8.4 percent rate in the second quarter.

Producers continued to run down their inventories in the third quarter -- investment in new stocks declined by $18.4 billion -- suggesting companies would aggressively purchase spare parts and finished goods over the next two quarters.

"Business investment is finally coming back strongly," said Thomas J. Duesterberg, president of the Manufacturers Alliance/MAPI, a business research organization in Arlington, Va. "This bodes well for continued robust growth into 2004."

The economic growth spurt is bound to generate employment, said Ayers. "Inventories are at rock bottom levels and will have to be rebuilt, and firms have done to their work force what they've done to inventory," he said.

Yesterday's encouraging economic data included a Labor Department report showing the number of Americans filing initial jobless claims fell 5,000 last week to 386,000, the fourth consecutive week claims were below 400,000, which some economists see as a beachhead for a recovering job market.

Unemployment remains high; the number of jobs lost in the third quarter reached 41,000, bringing the total number lost under President Bush to 2.6 million. Despite signs of life in the economy, the rate of job creation remains about one-third what it would take to keep up with the rate of population growth.

Economists attribute the sluggish employment numbers to rising productivity; years of flat growth has forced manufacturers to automate rather than hire more workers. But without a strong rebound in payrolls, economists warned, the economy could sputter once the impact of tax relief exhausts itself.

"These are very good numbers," said Christian Weller, an economist at the Washington-based Economic Policy Institute. "But to sustain them you need to augment consumer and capital spending with job growth."

The US trade deficit declined in the July-September period, a reflection of a weaker dollar that makes American products more competitively priced overseas. Export receipts rose 9.3 percent while imports were flat at 0.1 percent growth.

On an annualized basis, however, the value of US exports actually shrank from July to September, by $23.5 billion, its first decline since the first quarter of 2001 and its largest decline since the fourth quarter of 1996. The trend suggests that the dollar must continue to weaken to make US exports attractive for foreign buyers, particularly in China and Japan, where the administration is pushing for stronger national currencies to boost imports of US goods.

Stephen J. Glain can be reached at glain@globe.com.