U.S. GDP Lower Than Expected but Growth Fastest in 1 1/2 Years

WASHINGTON – The U.S. economy turned in a remarkably strong performance in the summer despite surging energy prices and the battering the Gulf Coast states took from hurricanes, although business growth was slightly lower than the government previously estimated.

The Commerce Department reported Wednesday that the gross domestic product, the nation's total output of goods and services, rose at an annual rate of 4.1 percent in the July-September quarter. It was the fastest pace of growth in 1 1/2 years.

While down slightly from the 4.3 percent GDP estimate made a month ago, the new figure demonstrated that the economy kept expanding at a strong pace during the summer, led by solid increases in consumer demand, especially for autos, and business investment.

The third-quarter performance was up substantially from a 3.3 percent GDP growth rate in the April-June quarter and was the best showing since the economy expanded at a 4.3 percent rate in the first three months of 2004.

Analysts believe growth has slowed substantially in the current quarter to around 3 percent, reflecting slower increases in consumer spending now that attractive auto incentives have been removed.

The increase in third quarter growth came despite the fact that the country was hit by Katrina, the most expensive natural disaster in U.S. history, and by Rita.

Both storms caused widespread devastation and a surge in energy prices reflecting lost production from Gulf Coast facilities. Analysts believe growth would have soared at a rate above 5 percent if it had not been for the adverse effects of the hurricanes.

An inflation gauge tied to the GDP rose at a rate of 3.7 percent in the third quarter, the fastest pace in more than a year and up from a 3.3 percent rate of increase in the second quarter.

However, excluding food and energy, the GDP inflation measure was up a more moderate 1.4 percent, the slowest increase in almost two years. Prices by this inflation measure had been estimated to have increased by an even lower 1.2 percent a month ago.

The economy had originally been estimated to have grown at a 3.8 percent rate in the third quarter, a figure that was revised up to 4.3 percent last month and now revised slightly lower to 4.1 percent.

The latest downward revisions reflected a slight change in the estimate of consumer spending, to a growth rate of 4.1 percent compared to last month's estimate of 4.2 percent. Based on more complete data, the government lowered slightly its estimate of the degree to which spending on new autos had surged during the quarter as consumers responded to attractive sales incentives.

Business investment to modernize and expand operations was growing at a strong annual rate of 8 percent in the summer, slightly lower than previously believed, while spending on housing grew at a 7.3 percent annual rate, also slightly lower than last month's estimate.

The GDP report also showed that the profits of U.S. companies from current production fell by $54.4 billion in the third quarter compared to an increase of $59.3 billion in the second quarter. The swing reflected in part a reduction in profits of $165.3 billion from Katrina and Rita, which reflected benefits paid by domestic insurance companies and uninsured losses to business property.