Economy grows at a 3.7 percent pace in third quarter

WASHINGTON (AP) - The economy grew at a 3.7 percent annual rate in the third quarter - a pace slightly better than in the spring but not as strong as many analysts expected. Friday's government report was the last broad snapshot of economic activity before Election Day and provided political ammunition for both sides.

The July-to-September reading on gross domestic product - the broadest barometer of the economy's health - followed a 3.3 percent growth rate in the prior quarter, the Commerce Department reported.

Analysts were predicting that the economy, which Federal Reserve Chairman Alan Greenspan had said hit a "soft patch" in the late spring, would gain traction and expand at a more brisk 4.3 percent rate in the third quarter.

GDP measures the value of all goods and services produced within the United States.

"The economy right now is running in the middle lane. We're not in the fast lane but we're not on the shoulder or in the break down lane," said Richard Yamarone, economist with Argus Research Corp.

Wall Street investors were a bit disappointed in the GDP figure with the Dow Jones industrial average up by just 6 points in late morning trading.

Although the third quarter's performance fell short of analysts' expectations, it still marked the best growth seen since the first three months of this year.

Consumers - the lifeblood of the economy - snapped out of a funk in the third quarter and boosted spending at the fastest pace in a year. Businesses also increased spending on equipment and software, but they didn't invest as aggressively on building inventories - a factor that restrained economic growth in the third quarter. The bloated trade deficit also weighed on economic activity.

President Bush and his Democratic rival, John Kerry, have divergent views about how the economy and the nation's job market are faring. Bush says his tax cuts helped the economy rebound from the 2001 recession and fostered payroll growth. Kerry contends that the tax cuts mainly helped the wealthy and thrust the government's balance sheets deeper in red ink.

The GDP report gave each camp something to seize upon.

Treasury Secretary John Snow said the administration was "encouraged by the ongoing strong performance of the American economy." The Kerry campaign countered that "the economic performance was disappointing for middle class families and below expectations."

In other economic news, employers saw costs for workers' wages and benefits grow by 0.9 percent in the third quarter, the same increase posted in the second quarter, the Labor Department said.

Even though the economy is expanding, the recovery in the job market has been uneven - a situation that has frustrated job seekers. Employers have added more than a million jobs in the past year, but since Bush took office in January 2001, the economy has lost a net 821,000 jobs.

The Federal Reserve, meanwhile, probably will boost short-term interest rates for a fourth time this year when its meet next on Nov. 10. With the economy out of crisis mode, Fed policy-makers want to continue to move rates from extraordinarily low levels to more normal levels to make sure that inflation doesn't become a threat to the economy down the road.

An inflation gauge tied to the GDP report and closely watched by Fed policy-makers showed that prices - excluding food and energy - rose at an annual rate of 0.7 percent in the third quarter, down from 1.7 percent rate of increase in the previous quarter.

From an economic point of view, inflation is still under control even through oil prices have been surging. Oil prices, which recently hit new record territory of just more than $55 a barrel, moderated on Thursday to $50.92 a barrel.

High energy prices pose a risk to the economy - especially if they cause consumers and businesses to become extremely cautious and cut back on spending and investment, analysts say. Economists believe that the impact of soaring energy prices could slow economic activity in the final quarter of this year.

In the third quarter, though, consumers seemed to be in the mood to treat themselves despite high energy prices. They increased spending at a 4.6 percent rate, up from a lackluster 1.6 percent pace in the prior quarter and the biggest increase since the third quarter of 2003.

Spending on big-ticket goods such as automobiles led the way. Consumer spending on such items went up at a whopping 16.8 percent pace in the third quarter, compared with a 0.3 percent rate of decline in the second quarter.

Business investment on equipment and software rose at a 14.9 percent rate in the third quarter, up from a 14.2 percent growth rate in the second quarter.

However, less aggressive spending on inventories by businesses ended up shaving 0.48 percentage point from third quarter GDP. The trade deficit reduced third-quarter GDP by 0.62 percentage point. Those were the two main factors tempering economic growth in the third quarter.

Government spending, meanwhile, increased at a 1.4 percent rate in the third quarter, down from a 2.2 percent growth rate in the prior quarter.