Economy’s Growth Is Revised Up

U.S. economic growth was much stronger last quarter than first thought as spending rose more than estimated, but divergent price data Wednesday left economists puzzled over inflation pressures.

Gross domestic product, a measure of all goods and services produced within U.S. borders, grew at a revised 4.3% annual rate in the third quarter, the fastest pace since the first three months of 2004, the Commerce Department said. Growth had initially been reported at 3.8%.

The report also showed inflation was milder than first thought. A price gauge favored by the Federal Reserve -- personal consumption expenditures excluding food and energy -- rose 1.2% in the July-to-September period, down from the originally reported 1.3% pace.

That was the lowest rate of so-called core inflation in more than two years. Economists had expected the index to be revised higher.

However, data from the private sector showed prices paid by businesses in the Midwest rose in November to their highest level in 26 years while business activity eased, suggesting it may be too early to dismiss the threat of inflation.

The Federal Reserve also raised a small inflation flag in its “beige book” summary of economic conditions, noting that some businesses had passed on higher costs for energy, raw materials and transportation to consumers. Upward pressure on wages, however, was modest.

Although the report noted some slowing in the housing market, it said commercial real estate was picking up, hiring across a variety of industries had increased, and several Fed districts were “generally optimistic” about the holiday shopping season.

The National Assn. of Purchasing Management-Chicago said its business barometer for November was at 61.7, compared with 62.9 in October and above Wall Street forecasts of 60. The prices-paid index surged to 94.1 from 79.6 in October.

“Today’s reports show the economy is still quite healthy. It has taken some hits last quarter with the hurricanes, but it’s still pretty resilient,” said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

“The Fed can see there are price pressures early in the process, but companies are able to offset that through increased productivity

Thayer said Wednesday’s data reinforced expectations that the Fed would raise interest rates in December and possibly in January, taking its key short-term rate to 4.5%, but could then stand pat as inflation pressures receded. Policymakers have raised rates 12 times since June 2004, taking overnight borrowing costs to 4% from 1%.

The Commerce Department report also showed Gulf Coast hurricanes Katrina and Rita hit corporate profits in the third quarter as insurers were sideswiped by huge benefit payouts and companies lost properties in the region.

After-tax corporate profits fell 3.7%, the largest decline in four years, after a 5.3% rise in the second quarter. The storms cut $151.2 billion from profits.

Although the GDP report reinforced the view that the U.S. economy was on a solid footing, economists expect growth to cool in the fourth quarter and into 2006 as the housing market starts to fade and consumers pull back.

The GDP growth in the third quarter was attributed to higher spending by businesses and consumers. Consumer spending advanced at a solid 4.2% pace, above the 3.9% rate first reported. Spending on housing grew at an 8.4% pace, up from the 4.8% first reported, after a 10.8% surge in the second quarter.

Business spending was also robust, climbing at an 8.8% pace, above the initially estimated 6.2%.