WASHINGTON -- The economy was stronger during the third quarter than previously believed and had plenty of momentum going into the end of the year, the Commerce Department reported yesterday.
The department's revised estimate for the three months ending in September showed a 3.9% jump in gross domestic product, up from the 3.4% gain originally reported last month.
The bond market initially retreated on the report, which was stronger than expected, as traders saw another piece of evidence that the economy is going to require more credit-tightening by the Fed before it cools off. "It suggests the economy had a lot of momentum going into the fourth quarter and was quite healthy," said Evelina Tainer, chief economist for Indosuez Carr Futures, in Chicago.
The upward revision to the GDP accounts came largely on a 14.4% surge in capital spending by business. Spending on computers and other items in the category of producers' durable equipment increased a whopping 21.5%.
In addition, businesses were found to have built up inventories by $56.1 billion, a large amount but slightly less than the gain of $59.2 billion in the second quarter. Analysts had expected a lower figure for inventories, which is one reason the overall GDP report turned out to be stronger than expected.
Still, real final sales, a measure of demand that excludes change in business inventories, rose 4.2%. That was a much faster pace than the 1.5% gain in the second quarter. Consumer spending, which accounts for two-thirds of GDP, increased 3.3% as buyers snapped up automobiles and other durable goods.
Fed officials have indicated they are seeking to slow the economy to an expansion rate of about 2.5%, which would be well below the 4.4% increase recorded over the previous year.
Typically, it can take up to a year for increases in interest rates to filter into the economy and affect decisions by consumers and businesses. The Fed began tightening credit in February, and the last increase in short-term rates to 5.5% from 4.75% took place Nov. 15.
Analysts believe that while 1994 appears to be ending with a bang, some slowing in the economy is in the wind next year in response to the Fed's six increases in short-term rates this year.
Still, Fed officials seem to have been surprised by the continuing bounce in the economy despite their efforts to slow it down. Federal Reserve vice chairman Alan Blinder and board governor John LaWare both commented this week on the economy's strength.
"Their comments really shook me," said Tainer, who is not ruling out the possibility that officials will act again to tighten credit at the Dec. 20 meeting of the Federal Open Market Committee. They may want to finish up the year with one more increase in rates and then wait three or four months instead of delaying a decision until their Jan. 31 meeting, she suggested.
Meanwhile, the Fed said revised estimates showed the U.S. industrial sector operated at 84.6% of capacity in October, down slightly from the 84.9% rate originally reported. Analysts said the change did not mean much and that plants are still humming.
