Economy Shrugs Off Hurricanes
Shrugging off the one-two punch of hurricane damage and soaring energy prices, the U.S. economy grew at a surprisingly strong 3.8% annual rate in the third quarter, the government reported Friday.
The improvement from a 3.3% clip in the previous quarter was propelled by a surge of consumer purchases, although that led to a negative savings rate. Sales of automobiles, generally offered at deep discounts for much of the period, led the way, the Commerce Department said.
Without the devastating effect of hurricanes Katrina and Rita on the Gulf Coast, growth would have been 0.5 to 1 percentage point higher, economists said. That would have put it comfortably over 4%, a level it has reached only three times in the last 20 quarters going back to 2000.
Inflation also was subdued. The Commerce Department’s index of personal consumption expenditures -- an inflation measure favored by Federal Reserve Chairman Alan Greenspan -- rose at an annual rate of 3.7%. But without energy and food, the increase was only 1.3%, down from 1.7% in the second quarter.
A separate Labor Department survey said employment costs grew by 0.8% in the July-to-September period, a combination of 0.6% wage growth and a 1.3% increase in health and other benefit costs. For the 12 months that ended in September, employment costs rose 3.1%, the lowest level since 1999.
That was good news for employers and suggested that recent increases in energy and food prices were not initiating an inflationary spiral in which wages push up prices.
“There is nothing here that looks remotely inflationary,” said Ian Shepherdson, chief U.S. economist with High Frequency Economics in Valhalla, N.Y.
Like almost all other economists, Shepherdson said the Fed -- concerned that low unemployment might cause an abrupt increase in wages -- would continue its policy of lifting its benchmark short-term interest rate by 0.25 percentage point at the two remaining meetings this year of its policymaking Federal Open Market Committee. The rate now stands at 3.75%, up from 1% in June 2004. The next meeting is Tuesday, followed by another Dec. 13.
But the modest wage and benefit increases weren’t good news for workers. Total compensation fell 1.5 percentage points short of keeping up with price increases over the last year, the Labor Department said.
Jared Bernstein, an economist with the liberal Economic Policy Institute, said the reports revealed “an ongoing, important imbalance in the economic expansion.” The economy was continuing to produce more goods and services, he said, but “this growth is failing to show up in hourly earnings.” That, he said, “will make it harder for working families to truly get ahead.”
Personal savings provided another troublesome note. The savings rate, barely above zero in the spring, plunged to minus 1.1% in the three summer months, meaning that people consumed more than they earned. It was the first three-month period of negative savings since the Commerce Department began measuring the savings rate in 1947.
Because of the way the Commerce Department accounts for rental property, the destruction of rental units by Hurricane Katrina accounted for about half of the third-quarter decline in the savings rate, said Dean Baker, co-director of the Center for Economic and Policy Research.
Even so, he said, “the fact that households are net borrowers should raise serious concerns about how well prepared baby boomers will be for retirement.”
Of more immediate concern is how well situated the economy is for further growth in the final quarter of 2005. Most economists said the evidence pointed to slower growth than the summer months’ 3.8% -- but faster growth than they had expected before Friday’s reports. Economists had expected only 3.6% growth for the third quarter.
A bullish indicator was a substantial decline in private inventories, suggesting that manufacturers would have to step up production to restock shelves.
On the bearish side were the negative savings rate, which is unsustainable in the long run, and the summer’s run of automobile sales, which has already ended. Motor vehicle sales accounted for nearly one-sixth of the increase in economic output in the July-to-September period.
Goldman Sachs, which had been predicting that growth would fall to an annual rate of 2.5% in the fourth quarter, raised its forecast to 3.5%.
Nigel Gault, U.S. economist for Global Insight in Lexington, Mass., said the Commerce Department could not collect complete data for the Gulf Coast because of the hurricanes and had to make some guesses in the third-quarter growth report.