South-Western College Publishing - Economics  
Economic Growth Exceeds Expectations
Subject Economic Growth and Inflation
Topic Productivity and Growth
Key Words

Durable Goods, Housing Sales, Economic Growth, and the Federal Funds Rate

News Story

The U.S. economy experienced more orders for durable goods and more new home sales in the third quarter of 2004. These unexpected increases added fuel to the growing economy and worries about possible inflation. Corporate spending also increased in the third quarter, 2004, and consumer purchases rebounded from the previous quarter as well.

The Commerce Department reported a 0.2 percent increase in durable goods purchases, resulting in $197.7 billion in sales. These increased purchases of durable goods, expected to last three years or more, was driven mainly by military hardware and business equipment. Transportation equipment orders fell slightly, but business equipment orders increased more than any other month since March, according to the U.S. Commerce Department.

Housing sales rose 3.5 percent, to an annual rate of 1.2 million new homes, the third fastest growth on record. This rise was unexpected, since analysts had expected housing to decline to an annual level of about 1.15 million.

The current trend may not continue if energy costs continue to rise. "The likelihood is that demand is going to soften again, given the high energy prices," said Peter Kretzmer, a senior economist at Bank of America Securities. "The economy will slow late in the fourth quarter and into early 2005."

If the economy continues to grow instead, the Federal Reserve will try to balance prospects for continued growth against the possibility of more inflation. The Fed is expected to raise the federal funds rate at its November meeting to counter the inflation expectations that accompany economic growth.

(Updated December, 2004)

Questions
1.

How does the Commerce Department define a durable good?

2. Why do increases in the federal funds target rate, set by the Fed, combat inflation?
3. Why are new home sales so important when measuring growth? Why aren't all home sales relevant to this measure?
Source Bloomberg News, "The Economy Grew Faster Than Expected, Helped by Home Sales," New York Times Online, October 10, 2004.

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