US economic growth was much stronger in the third quarter than first thought as consumers and businesses spent more than estimated, but Gulf Coast hurricanes sideswiped corporate profits, a government report showed on Wednesday.
US gross domestic product, a measure of all goods and services produced within US borders, grew at a revised 4.3 percent annual rate in the July-to-September period, the fastest pace since the first three months of 2004, the Commerce Department said.
In its first snapshot a month ago, the department had put third-quarter growth at 3.8 percent and Wall Street economists had expected the rate to be revised up more modestly, to 4.0 percent. The sharp upward bump took growth a full point above the second-quarter's 3.3 percent rate.
"Clearly the economy had a good head of steam on it right through the hurricane period," said Alan Ruskin, research director at 4CAST Ltd in New York.
The report, however, also showed inflation was lower than first thought. The core consumer price index, which strips out volatile food and energy prices and is the Federal Reserve's favoured inflation measure, moved up just 1.2 percent, down from the 1.3 percent pace originally reported.
That was the lowest rate of core inflation in more than two years. Economists had expected the index to be revised higher, and the tame number reassured investors the extra spending had not stoked price rises, giving support to US Treasury bonds.
A separate report showed prices paid by businesses in the US Midwest rose in November to their highest in 26 years even as business activity eased slightly, suggesting it may be too early to dismiss the threat of inflation and giving the Treasury bond market a jolt.
The National Association of Purchasing Management-Chicago said its prices paid measure soared to 94.1 from 79.6, while its business barometer fell to 61.7 from 62.9. A reading above 50 means activity is growing in the region.
The Fed has raised short-term interest rates 12 times since mid-2004 in a bid to keep price rises in check, but many analysts suspect the rate-hike campaign is nearing an end.
While the GDP report reinforced the view the US economy is on a solid footing, economists expect economic growth to cool in the fourth quarter and into 2006 as the housing market starts to fade and consumers pull back.
"We still think that the growth rate will slow substantially in the fourth quarter, in part because the housing sector is softening which will tend to soften consumer spending as well. That is one factor that will probably help the Federal Reserve eventually conclude its monetary tightening cycle," said Patrick Fearon, senior economist at A.G. Edwards & Sons in St. Louis.
The Commerce Department report also showed corporate profits after tax fell 3.7 percent, the largest decline in four years, after a 5.3 percent rise in the second quarter. Profits were reduced by $151.2 billion at an annual rate because of Hurricanes Katrina and Rita, as insurance companies made huge benefits payments and uninsured corporate property was lost.
The stronger-than-expected GDP growth was attributed to higher spending by both businesses and consumers. Consumer spending advanced at a solid 4.2 percent pace, above the 3.9 percent rate first reported. Spending on housing grew at an 8.4 percent pace, up from the 4.8 percent growth first reported, after a 10.8 percent surge in the second quarter.
Business spending was also robust, climbing at an 8.8 percent pace, above the initially estimated 6.2 percent growth.