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Healthy 3rd-Quarter GDP Soothes Economists

Posted on: Friday, 28 October 2005, 21:00 CDT

CHICAGO _ The U.S. economy accelerated at a faster-than-expected clip in the third quarter, the Commerce Department said Friday, and the report drove the Dow Jones industrial average up more than 170 points.

Helped by unusually strong consumer spending on automobiles and an upturn in the amount businesses spent on equipment, the nation's gross domestic product grew at an annualized rate of 3.8 percent, the report said.

Although that performance only modestly exceeded the 3.6 percent or 3.7 percent rate most economists had been expecting, it helped soothe some investor worries that the economy might be flagging.

"A pretty decent number," Merrill Lynch economist David Rosenberg suggested.

The GDP data, coming on the heels of a second quarter that saw 3.3 percent growth, "suggest the case for sustainable growth remains in place," said Wachovia economist John Silvia.

But while economists were content to cautiously crunch the numbers, Wall Street embraced the report as a good reason to stage a party. Stocks soared, with the Dow recording a jump of 172.82 points, or 1.7 percent, to close at 10,402.77. The only one of the 30 Dow stocks that didn't gain was IBM.

After the GDP report was issued, noted the market-analysis firm Briefing.com, "buyers returned to the market in aggressive fashion."

The report is what's known as an "advance" estimate, a preliminary reading that involves a certain amount of guesswork because certain figures for the quarter's final month are still coming in. It is routinely adjusted in subsequent months.

Friday's report is thought to be burdened with more such uncertainty, because Hurricane Katrina's end-of-August blast to the Gulf Coast disrupted energy production, manufacturing across a broad region, national transportation systems, even international trade in grains and other economically important commodities.

Economy.com's Augustine Faucher noted, "Katrina had only a limited negative impact (on the first GDP report), as it did not strike until two-thirds of the way through the quarter."

In short, BMO Nesbitt Burns Doug Porter told the Associated Press, the report "basically drove home the point that the economy was healthy before the hurricanes and indeed may have remained healthy afterward as well."

Government spending jumped 7.7 percent in the quarter, presumably reflecting the first wave of federal post-hurricane relief spending. Investment in housing eased but remained at a very strong level, while business inventories declined, in part because of Katrina-related shortages and transportation problems. Businesses increased spending on equipment and software at an 8.9 percent pace.

The current worries about the economy's staying power center on how much the ultrahigh post-Katrina gasoline prices will crimp consumer spending. Consumers spent at a robust 3.9 percent rate in the quarter, the strongest pace since the end of last year.

But the University of Michigan said Friday that consumer confidence fell this month to the lowest level in 13 years because of energy costs, and the Labor Department reported that wages in the third quarter increased by the smallest amount since 1981.

Economic growth in the fourth quarter "will be below potential" because the negative impact of Katrina's disruption will play a more prominent role, noted Faucher.

But he added that it will accelerate in the first half of 2006 as energy prices decline and heavy federal reconstruction spending kicks in. Those factors "will largely absorb any remaining slack in the economy."

Friday's big stock-market rally wasn't limited to the blue-chip Dow industrials. The broader Standard & Poor's 500 index climbed 19.51, or 1.6 percent, to 1,198.41. And the technology-heavy Nasdaq composite index rose 26.07, or 1.3 percent, to 2,089.88.

As part of its reorganization, bankrupt Delta Air Lines announced plans to close down its discount carrier Song, created to compete with low-cost rivals like Southwest Airlines, JetBlue Airways and AirTran Airways. The news lifted JetBlue 76 cents, to $18.05, and AirTran added 19 cents, to $14.40. Southwest rose 31 cents, to $15.75.

Microsoft advanced 68 cents, to $25.53, and was the biggest contributor to the S&P 500's gain. According to Bloomberg News, a Credit Suisse First Boston analyst raised Microsoft's rating to "outperform" from "neutral."

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(c) 2005, Chicago Tribune.

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Distributed by Knight Ridder/Tribune Information Services.

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GRAPHIC (from KRT Graphics, 202-383-6064): GDP

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Source: Chicago Tribune

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