WASHINGTON – In the last major economic report before Tuesday’s presidential election, the government reported Friday that the economy looked solid in the third quarter – just not as strong as most analysts had expected.

The Commerce Department said gross domestic product increased at a 3.7 percent annual rate in the July-September quarter, modestly higher than the second quarter’s 3.3 percent rise.

The report’s political impact appeared to be mixed, favoring neither side clearly. The Bush administration said the numbers showed a continuing strong recovery, while Sen. John Kerry’s camp said the economy is still not creating enough jobs.

The consensus was for a 4.3 percent increase. But the economy stopped short of that higher rate of growth because cautious businesses failed to build up their inventories as much as expected, said Peter Kretzmer, economist for the Bank of America.

It was the 12th straight quarter of economic expansion. But growth in the early part of the recovery, affected by the Sept. 11, 2001, attacks, was anemic. Tax cuts and lower interest rates helped propel the economy to a higher level in 2003.

Inflation remained well under control despite the fact that consumers defied economic uncertainties and went on a major shopping spree.

An index measuring the price changes in personal consumption expenditures rose 1.1 percent, despite record oil prices. But prices excluding food and energy – numbers closely watched by the Federal Reserve – nudged upward by only 0.7 percent.

The central bank is likely to go ahead with another small increase in short-term interest rates when it meets on Nov. 10, economists said.

The GDP report contained solid pluses and some worrisome negatives. Consumer spending, which increased at a meager 1.6 percent annual rate in the second quarter, surged to a 4.6 percent annual rate in the third – a sign that the economy had clearly shaken off an early summer “soft patch.”

“This was the fastest consumption growth in the past year, putting to rest the notion that consumer spending is slowing,” said Brian Wesbury, economist at Griffin, Kubik, Stephens & Thompson Inc.

People stepped up their spending for automobiles in particular, as Detroit dangled incentives before buyers. Computer purchases also were strong. But consumers continued their strong appetite for imported goods, which held back economic growth as dollars earned at home went overseas.

“Consumers still seem willing to spend, and to spend heavily on big-ticket items,” said Parul Jain, deputy chief economist at Nomura Securities International Inc. “Obviously, a lot of it was auto-driven. There could be a little bit of deceleration (in spending) in the fourth quarter.”

Joel Naroff, who runs his own economic consulting firm in Holland, Pa., said, “Personal income is not growing at a very good clip, and that does not bode well for future consumption.”

Indeed, disposable personal income, which rose $116 billion in the second quarter, increased by only $53 billion in the third. Also, during the July-to-September period, job growth was disappointing, indicating that a stronger economic growth rate than 3.7 percent may be required to reduce joblessness.

“Unless uncertainties diminish along with a lower price of oil and accelerated job growth, consumers won’t be the primary source of economic strength in the future,” said Sung Won Sohn, chief economist at Wells Fargo Bank.

GDP would have been much stronger if companies had built up heavier inventories, and if consumers had spent less for imports while companies had been able to export more.

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Inventories, which jumped $61.1 billion in the second quarter, increased by only $48.1 billion in the third. Meantime, the trade deficit widened during the quarter. Imports rose at an annual rate of 7.7 percent, while exports went up at a 5.1 percent annual rate.

Peter Morici, business professor at the University of Maryland, said one ominous sign is that the U.S. has a deteriorating trade balance in services, in addition to a deficit in merchandise trade.

Spending on business investments increased at an 11.7 percent annual rate, down slightly from the second quarter. The Bank of America’s Kretzmer said spending on high-tech equipment cooled, but other business-equipment purchases surged.

“Businesses are trying to improve efficiency, not necessarily increase capacity,” said Sohn, a sign that hiring will continue to be slow.

Treasury Secretary John Snow said in a statement that the administration is “encouraged by the ongoing strong performance of the American economy … GDP continues to grow above the average of the 1970s, “80s and “90s, while the unemployment rate remains below the average for those decades.”

Snow credited Bush’s tax cuts and lower interest rates. He said more needs to be done to encourage growth and create jobs.

By contrast, Gene Sperling, an economic adviser to Kerry, said the third quarter brought disappointing economic performance for middle-class Americans.

“With lost manufacturing jobs, anemic private-sector job growth, three straight months of declining consumer confidence and spiraling oil prices, most middle-class families will find it hard to swallow the Bush administration’s spin that this is the best economy of our lifetime,” he said.

The GDP figures show that economic output in current dollars increased at a seasonally adjusted annual rate of $11.8 trillion in the third quarter, $146 billion higher than in the second quarter.

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(c) 2004, 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

AP-NY-10-29-04 2025EDT

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