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 lowered corporate profits, a government report showed today.
US gross domestic product, a measure of all goods and services produced within US borders, grew at a revised 4.3 per cent 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 per cent and Wall Street economists had expected the rate to be revised up more modestly, to 4 per cent.
"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.
Inflation was a bit lower than first reported, the report showed. The core consumer price index, which strips out volatile food and energy prices and is the Federal Reserve's favored inflation measure, moved up just 1.2 per cent, down from the 1.3 per cent pace originally reported.
That was the lowest rate of core inflation in more than two years. Economists had expected the price index to be revised higher, and the surprise downward revision suggests Fed policy-makers have little to be concerned about on the inflation front.
The dollar gained against the euro on the unexpectedly strong upward revision to growth, while the price of US Treasury bonds rose as the tame inflation data reassured investors the extra spending had not stoked price rises.
Overall, the report reinforced the view that the US economy is on a solid footing, with tame inflation and strong consumer and business spending.
Economists expect growth to cool in the fourth quarter and into 2006, however, 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 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 tightening cycle is nearing an end.