US economy enjoys faster growth

Consumer spending keeps making the US economy bigger and bigger

The US economy strengthened in the third quarter, driven higher by strong government and consumer spending, and despite damage caused by hurricanes.

Gross domestic product (GDP) expanded by an annual rate of 3.8% in the three months from July through September, the Commerce Department said.

That compares with 3.3% in the second quarter and topped market estimates.

Analysts said that the Federal Reserve was now likely to raise interest rates from their current 3.75% level.

'Positive, strong report'

There had been concerns that the cost of rebuilding after hurricanes Katrina and Rita, coupled with record oil prices, would slam the brakes on growth.

It now looks as if the US economy will keep motoring through to the end of the year, analysts said.

"This is a very positive, strong report and encouraging because it included Katrina and a spike in oil prices and we still just seem to have a lot of momentum going into the fourth quarter," said Kurt Karl, an economist at Swiss Re.

"We are looking at very strong consumption spending. Imports are nowhere and exports are very strong.

'Stronger still'

Consumer spending during the quarter increased by 3.9%, while business spending was up 8.9%, and spending by the federal government rose 7.7%.

The data "suggests that the underlying economy was stronger still", said Pierre Ellis, an analyst at Decision Economics.

High oil prices had seemed to be a loaded economic gun

He continued that the Fed was unlikely to accelerate interest rate increases because "growth and inflation are quite well balanced".

The Fed has increased borrowing costs steadily from 1% to the current level of 3.75%, and said it will act in a measured way to combat inflation.

Friday's GDP report also contained inflation figures that showed a decline in the core level of price growth.

Excluding food and energy prices, the core inflation rate was 1.3% during the quarter, down from 1.7% in the previous quarter.

'Guessing game'

While the reaction to the figures has been positive, some analysts urged caution, warning that there may still be problems despite reassurances that the effects of the hurricanes have generally been absorbed.

"This data will tell us little about the economy going forward," said Michael Englund, an economist at Action Economics.

"Usually after a hurricane, we don't see the impact in sales but in inventories and in trade, and we don't yet have September trade data and we don't have September inventory data.

"It really is a Katrina guessing game."