U.S. Economy Spurts As Consumers Spend




WASHINGTON -- Economic growth barreled ahead in the third quarter, pushing GDP to an inflation-adjusted $8.9 trillion and raising expectations that the U.S. Federal Reserve will bump up interest rates again early next year.


Propelled by brisk consumer spending, the third quarter's revised 5.5 percent rate of increase in the gross domestic product - the total output of goods and services - marked the biggest spurt since the end of last year, the Commerce Department said Wednesday.


It followed an anemic 1.9 percent rate of growth in the second quarter.


In addition to hardy consumer spending, a strong buildup in business inventories and an improvement in the trade deficit contributed to third-quarter growth, which was even stronger than the 4.8 percent rate the government estimated one month ago.


In the current fourth quarter, many economists are pegging economic growth in the 5 percent range, considerably higher than the Federal Reserve's preferred 3 percent speed limit, believed to be the growth rate that can be sustained without sparking inflation. Given that, many economists said the odds are increasing that the Fed will raise rates again in February or March.


"It's an economy that is growing strongly and will continue to grow well above a sustainable pace - well above its speed limit,'' said Tim O'Neill, chief economist for Bank of Montreal and Harris Bank.


Last week, the Federal Reserve raised interest rates for a third time this year to slow down the economy and keep inflation under control.


But Fed policy-makers signaled they may be content to leave rates alone for the rest of the year. Many economists believe the Fed will not act when it meets next, on Dec. 21, particularly out of concern for problems that may arise over the Y2K computer changeover.


In a separate report, the number of Americans filing for unemployment benefits last week fell unexpectedly by 13,000 to 274,000, the second weekly drop in a row, the Labor Department said.


Analysts consider jobless claims below 300,000 an indication of an extremely tight labor market, meaning employers who find it difficult to fill job openings will woo workers with higher wages and benefits. The Fed and economists fear those increased costs could result in higher prices, triggering inflation.


"Both reports have raised the Fed's level of concern to Defcon 4 - high inflation alert status," said Richard Yamarone, an economist with Argus Research Corp.


"Inflation doesn't seem to be a problem now, but the combination of strong growth and a tight labor market could produce inflation down the road."