U.S. Economy’s Growth Slows by Half to 2.7% Pace in 3rd Quarter

The U.S. economy operated at half speed this summer, expanding at a 2.7% pace that shredded the overly optimistic profit projections of some of America’s best-known companies but reassured policymakers that growth is finally slowing to a more sustainable pace.

The growth rate for the July-September quarter was less than half the 5.6% pace that the economy posted in the previous three months and substantially less than the 3.6% rate that the majority of economists had predicted, according to figures released Friday by the Commerce Department.

But that didn’t bother most analysts and investors, who took the new numbers as evidence that Federal Reserve efforts to slow the economy without stalling it are working. Wall Street reacted to the new growth numbers Friday by sending stock prices moderately higher.

“Slower growth is better growth because it’s more durable, and this is slower growth,” said Frederick Breimyer, chief economist for State Street Corp., a Boston-based financial services firm.

At least so far, the Fed seems to be pulling off the double-barreled feat of orchestrating a slowdown without driving the stock market into the ground.

Some analysts had worried that, with stock prices near historic highs earlier this year, anything less than feverish growth could cause the market to crack. But although many shares, especially high-tech ones, have taken a drubbing, the market as a whole has managed to avoid a major rupture.

The central bank has raised interest rates six times since June of last year to slow the economy to avoid a resurgence of inflation.

Analysts said the new numbers do contain some worrisome economic signs.

For example, business investment, which has been widely credited with extending the life of the current boom and helping to hold down inflation, grew at a 6.9% pace in the latest quarter, down from a roaring 14.6% rate of the previous quarter. Especially crucial investment in equipment and software rose at an 8.5% rate, far short of the double-digit pace that had been expected.

“This is the first real sign of a break in the investment boom,” said Mark M. Zandi, chief economist at Economy.com, a suburban Philadelphia consulting firm.

But for every such worry, commentators found something else in the figures to cheer about.

Most said the 2.7% number overstates the extent of the slowdown because it includes a sharp, but almost certainly one-time, drop in government spending connected with the layoff of workers who conducted the 2000 census.

“There will be some bounce-back next quarter,” predicted Michael J. Moran, chief economist with Daiwa Securities America Inc. in New York.

Most analysts said the new figures showed that consumers, whose buying accounts for two-thirds of the nation’s economic activity, remain strikingly optimistic even in the face of stock market reverses and higher energy prices.

Consumer spending grew at a 4.5% pace during the third quarter, an increase from the 3.1% rate of the spring quarter. Spending on big-ticket items such as cars, appliances and furniture grew at an even stronger 7.5% rate, reversing a 5% decline in the previous quarter.

In a separate report Friday, the University of Michigan said that its consumer sentiment index fell to 105.8 this month from 106.8 in September. Although a decline, the new figure was the same as that for all of 1999 and suggested that with unemployment at a 30-year low, consumers remain bullish about their prospects.

The pickup in consumer spending during the quarter occurred without fueling substantial new inflation. The so-called GDP deflator, a broad measure of inflation tied to the growth figures, showed that prices rose at a 2.4% pace in the summer quarter, only slightly higher than the 2.1% rate of the previous quarter.

The economy’s growth during the quarter was the slowest in more than a year. The last time the nation’s gross domestic product--the sum of all goods and services produced in the nation--expanded at a slower rate was in spring 1999, when it was 2.5%. For most of the last four years, it has bounced between 3% and more than 8%.

The slowdown has taken its toll on the sales and stock prices of some of the nation’s highest-profile companies.

IBM, the world’s biggest computer company, saw its stock nose-dive after announcing that software sales fell an unexpected 3% during the quarter. IBM stock, which rose 94 cents to close at $93.69 on Friday on the New York Stock Exchange, is down 13% for the year.

Intel, the biggest computer-chip maker, has lost 38% of its stock value since announcing that quarterly revenue had grown, but at only half the rate analysts had forecast. Intel shares rose $1.69 Friday to close at $46.38 on Nasdaq.

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Gross Domestic

Product

Percentage change from previous quarter, annualized real rate:

Third quarter: +2.7%

Source: Commerce Department