US economy picks up pace slightly in third quarter

Yesterday, the US Department of Commerce reported that real GDP increased at an annual rate of 3.7 percent in the third quarter of 2004. In the second quarter, real GDP increased 3.3 percent.

The major contributors to the increase in real GDP in the third quarter were personal consumption expenditures (PCE), equipment and software, exports, government spending, and residential fixed investment.

What stood out was the increase of 4.6 percent in real personal consumption expenditures, compared with an increase of 1.6 percent in the second. This shows that the consumer remains an important -- and resilient -- driver of growth.

Real disposable personal income increased 1.4 percent in the third quarter, compared with an increase of 2.4 percent in the second quarter. As a result of spending going up more than income, the personal saving rate decreased from 1.2 percent in the second quarter to 0.4 percent in the third.

And this is the worrisome part. With the saving rate so low, there is little room for further strong increases in consumer spending. This does not bode well for the economy going forward.