US economy continues to grow, along with the deficit

The US economy grew at a respectable but not startling pace in the third quarter this year - suggesting that the recovery is continuing, but not as fast as most analysts had expected.

The US economy grew at a respectable but not startling pace in the third quarter this year - suggesting that the recovery is continuing, but not as fast as most analysts had expected.

In the last major economic announcement before Tuesday's presidential election, the Commerce Department reported that the gross domestic product grew by a provisional 3.7 per cent in the third quarter.

The good news was a recovery in consumer spending - the bad news a slowdown in corporate inventory growth, and a further increase in the country's record trade deficit - now running at an annual rate of some $600bn, or 5 per cent of GDP.

Both campaigns immediately seized on the figures, but offered different interpretations. For Democratic challenger John Kerry, the "disappointing" data gave the lie to "Bush Administration spin that this is the best economy of our lifetime". It confirmed that "this President had been the first since the 1930s to preside over declining real exports and business investment during his term." But the White House spoke of the "ongoing strong performance of the American economy".

During the July/September period, consumer spending climbed at a 4.6 per cent annual rate, the fastest since the third quarter of 2003. But the huge trade deficit knocked 0.6 per cent of potential growth, as demand turned to foreign-made, rather than domestic products.

The GDP data also showed that costs for workers' wages and other benefits grew over the quarter by 0.9 per cent, suggesting that the labour market is improving - but too late to change the net loss of over 800,000 jobs since Mr Bush took office in January 2001.

The figures appear to bear out the optimism of Federal Reserve chairman Alan Greenspan that the economy has weathered the "soft patch" of late spring, and has not been overly affected by the surge in oil prices to over $50 a barrel.

According to economists, the figures make it more likely the central bank's policy-makers will raise short-term rates for a fourth successive time when they next meet on 10 November, a week after polling day.

But the expected 0.25 per cent rise in the target federal funds rate would leave it at only 2 per cent, still well below what the Fed thinks is a policy-neutral level of 3-3.5 per cent. Inflation however does not look a threat. Consumer prices rose 0.7 per cent in the quarter.