Economy picked up a bit in 3rd quarter But experts warn of slower new year


NEW YORK -- Powered by low interest rates and open-handed consumers, the economy snapped out of the doldrums in the third quarter to post its highest growth this year.

But some economists cautioned that the economy may not continue to move as smartly next year, when new taxes and waning confidence in the economy could combine to slow growth.

According to figures released yesterday by the Commerce Department, the gross domestic product -- the sum of all goods and services produced in the United States -- expanded at a 2.8 percent annual rate during the July-September period. The growth came despite flooding in the Midwest and droughts in the Southeast.

"The numbers weren't too good, and they weren't too bad," said Robert Dederick, chief economist of the Northern Trust Co. in Chicago. "If they had been too good, they would have reignited concerns about inflation. If they had been too bad, they would have caused worry about the economy's recovery. They were about right."

Wall Street seized on the moderate figures to boost the Dow Jones Industrial Average 23.20 points, to a record close of 3,687.86. Traders said they were happy that growth was picking up while inflation seemed to be in check.

Most economists had predicted that the economy would grow 3 percent this year -- a plateau that allows it to absorb new workers and reduce unemployment. But during the first three months of the year, the economy grew just 0.8 percent and during the second quarter it expanded just 1.9 percent.

Even though a 3 percent rate is unlikely to be reached for the entire year, yesterday's report was further evidence of a quickening economic recovery. The economy is expected to grow 3.5 percent or 4 percent during the current quarter, which ends Dec. 31, and to average 3 percent next year.

"The economy is clearly picking up steam," said Paul Boltz of T. Rowe Price & Associates. "It's doing what it's expected to be doing."

The growth was led by consumer spending, which increased 4.2 percent after growing 3.4 percent in the second quarter. Consumers seemed to contradict gloomy answers they have given to opinion polls on consumer confidence by investing heavily in in big-ticket items, such as televisions and automobiles. This category rose at a 7.5 percent rate.

"If consumers are depressed, they seem to be picking themselves up by buying," Mr. Boltz said.

Lower rates helped as well, pushing up housing construction at an annual rate of 10.1 percent and business investment in equipment, which was up 9 percent.

The growth came without the usual increase in prices. The report showed that U.S. residents paid just 1.8 percent more for goods, suggesting that inflation is not a problem.

The Commerce Department's report, however, did show some areas of weakness.

Exports, for example, decreased $4.9 billion in the third quarter as U.S. trading partners saw their economies shrink or stagnate. Another limit on growth was a decline in government purchases, especially defense orders, which sank $5.3 billion.

That decrease helps explain why Maryland and other states dependent on defense purchases may not be growing at the national rate. While the state's rate was not released yesterday, other figures have shown that the local economy will be lucky to grow 1 percent this year.

While virtually all economists agree that the economy is growing even more strongly during the current quarter, some believe that this will taper off next year as it did after last year's strong finish. The reason: higher taxes and unsustainably high levels of credit.

"The White House is right to celebrate the new statistics," said Lawrence Kudlow of Bear Stearns & Co. Inc. "But I don't think that this celebration is sustainable."

Although the new taxes are to be phased in over time, taxpayers may slow purchases next spring when they see what they owe the Internal Revenue Service, Mr. Kudlow said.

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