U.S. Economy Surges 7.2% in Third Quarter

WASHINGTON -- The economy grew at a scorching 7.2 percent annual rate in the third quarter in the strongest pace in nearly two decades. Consumers spent with abandon and businesses ramped up investment, compelling new evidence of an economic resurgence.

The increase in gross domestic product, the broadest measure of the economy's performance, in the July-September quarter was more than double the 3.3 percent rate registered in the second quarter, the Commerce Department reported Thursday.

The 7.2 percent pace marked the best showing since the first quarter of 1984. It exceeded analysts' forecasts for a 6 percent growth rate for third-quarter GDP, which measures the value of all goods and services produced within the United States.

The economy's recovery from the 2001 recession has resembled the side of a jagged cliff; a quarter of strength often has been followed by a quarter of weakness. But analysts are saying that pattern could be broken, considering increasing signs the economy finally has shaken its lethargy and is perking up.

Near rock-bottom short-term interest rates, along with President George W. Bush's third round of tax cuts, have helped the economy shift into a higher gear during the summer, economists say. The next challenge is making sure the rebound is self-sustaining, they say.

The administration has argued that as economic growth improves, meaningful job creation will follow. Bush will be counting on that as he heads into the 2004 presidential election season.

Economists believe the economy will grow at a slower -- but still healthy -- 4 percent rate in the final quarter.

In the third quarter, consumers ratcheted up their spending at a brisk 6.6 percent annual rate. That was the biggest increase since the first quarter of 1988 and was up from a 3.8 percent pace in the second quarter.

Especially encouraging was the 15.4 percent growth rate in spending by businesses on equipment and software in the third quarter. That marked the largest increase since the first quarter of 2000 and was up from an 8.3 percent growth rate in the second quarter.

The red-hot housing market, powered by low mortgage rates, also contributed to the strong showing on third quarter GDP. Investment on residential projects grew at a 20.4 percent rate, the biggest increase since the second quarter of 1996, and more than three times the 6.6 percent growth rate seen in the second quarter.

Federal government spending, which grew at a 1.4 percent rate, was only a minor contributor to GDP in the third quarter. Spending on national defense was flat. But in the second quarter, military spending on the Iraq war -- which grew at a whopping 45.8 percent rate -- helped to catapult economic growth.

A better trade picture in the third quarter also contributed to GDP growth.