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Consumer Confidence Builds and Spending Surges Third Quarter Marks Most Consistent Growth of the Decade CHARLOTTE, N.C. -- The report that third quarter real GDP rose at a 3.5% annual rate marks the first time since 1984 that there have been four consecutive quarters with better than 3.0% growth, and puts the average for the past year at 4.1%, also the best since 1984. "The consistency of growth, even more than the magnitude, is a key factor in developing confidence among consumers and businesses," said David Orr, Chief Capital Markets Economist at First Union Corporation. There have been spurts of b growth earlier in the decade, but the pattern was not consistent. Even during 1994, the previously best year, there was a quarter that came in below 2%. "The inconsistency was part of the reason so many people doubted the durability of the 1990's expansion," said Orr. During the third quarter, consumer spending - adjusted for inflation - surged, rising at a 5.7% annual rate, led by durable goods such as cars, furniture and computers. That sector jumped 16.7%, followed by non-durables, such as food, clothing, and gasoline, up 4.7%. Spending on services rose 4.1%. Once again, the most rapidly growing sector was spending on business equipment, which increased 18.7% led by information processing equipment, up 33.8%. This sector is where the bulk of the digital technology revolution is captured, and its impact is nothing short of phenomenal. "Although its weight is only 5% of total GDP, it has accounted for 25% of all the growth over the past two years," said Orr. Construction activity contributed a moderate positive to the results, with residential housing up 2.8% and spending on commercial structures up 10.1% both after adjustment for inflation. The government also helped out, with spending up 1.0%. Federal spending declined 1.1%, but state & local government showed a 2.2% increase. Those components of the GDP, know as domestic final sales, rose at a 6.3% annual rate after adjustment for inflation. The two sectors that detracted from growth in the quarter were foreign trade and inventories. The Net Export figure (exports minus imports) worsened to a minus $160 billion deficit from $136 billion in the second quarter, subtracting 1.4 percentage points from the total. Import growth of 14.0% outdid a 5.6% increase in exports. Inventories rose at a $51.5 billion annual rate in the quarter, very b, but less than the $77 billion of the second quarter, thereby knocking 1.5 points off the overall growth rate. Orr's expectation is that economic growth will continue to expand solidly over the next several quarters, which would keep the Federal Reserve on "inflation alert." "Despite the fact that inflation rose at only a 1.4% rate in the third quarter, according to today's report, the Fed is concerned about the potential problem posed by excessive growth of money and credit, both of which have been accelerating sharply since midsummer," he said. Orr is a senior vice president in economic research in First Union Capital Markets Corporation, a subsidiary of Charlotte-based First Union Corporation. First Union serves 12 million retail and commercial customers and operates full-service banking offices throughout the East Coast from Florida to Connecticut. First Union Corporation had assets of approximately $144 billion at September 30, 1997. -- END -- |
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