Economy Grows At Brisk 3.9% Pace In Summer

Wednesday, October 31st 2007, 8:33 am
By: News On 6

WASHINGTON (AP) _ The economy picked up speed in the summer, growing at a brisk 3.9 % pace, the fastest in 1 1/2 years and an impressive performance even as a credit crunch plunged the housing market deeper into turmoil.

The latest snapshot of the country's economic health, released by the Commerce Department on Wednesday, suggested that the economy is demonstrating much resilience and thus far holding up well to the strains in the housing and credit markets, which had intensified during the third quarter and rocked Wall Street.

Individuals ratcheted up their spending. U.S. businesses sold more goods abroad and boosted some investment at home. Those were some of the main factors helping to push up overall economic activity in the July-to-September quarter.

The third quarter's growth rate was up slightly from a 3.8 % pace logged in the second quarter. It marked the strongest showing since the first quarter of last year.

The increase in third quarter gross domestic product exceeded analysts' forecasts for a 3.1 % growth rate for the period. Gross domestic product is the value of all goods and services produced within the United States and is considered the best barometer of the country's economic fitness.

The strong performance came despite the worsening housing slump.

Builders slashed investment in housing projects by 20.1 %, on an annualized basis, in the third quarter, the largest drop in a year. That was even deeper than the 11.8 % annualized cut made in the second quarter and provided stark evidence of the problems in the housing market.

The new figures on the economy come as the Federal Reserve meets for a second day Wednesday to weigh whether it needs to lower a key interest rate to protect the economy down the road from the ill effects of the ailing housing market. Wall Street investors are betting on a smaller, one-quarter percentage point cut. That would follow up on a bolder half-percentage point reduction ordered in September, the first rate cut in more than four years.

The ill effects of the housing slump and credit crunch, however, didn't deter consumers.

Consumers, whose spending is an important ingredient for the economy's good health, actually rediscovered their appetite to spend in the third quarter. Their spending rose at a 3 % pace, a considerable improvement from the second quarter's rather weak 1.4 % growth rate.

One of the reasons why people are continuing to spend is because the nation's employment climate has managed to stay fairly sturdy through all the problems.

Wage and job gains have served as shock absorbers for some of the negative forces of an ailing housing market, weaker home prices and more restrictive credit.

In other economic news, the Labor Department reported that employers' costs to hire and retain workers rose by 0.8 % in the July-to-September quarter. That was down a bit from a 0.9 % increase posted in the second quarter but marked a solid showing.

Still, the carnage in the housing meltdown has been painfully felt, especially in the area of higher-risk ``subprime'' mortgages made to people with spotty credit. Home foreclosures have soared. Lenders have been forced out of business. And, financial institutions have racked up huge losses.

Businesses, meanwhile, increased their spending on equipment and software at a 5.9 % pace in the third quarter, up from a 4.7 % growth rate in the prior period. They also boosted their investment in inventories, another factor that added to GDP.

Strong sales of U.S. exports to foreign buyers was another big factor in the good third-quarter showing. Exports of goods and services grew by 16.2 %, on an annualized basis, during the quarter. That was the biggest increase since the final quarter of 2003.

Business investment in commercial structures, such as office buildings and factories, grew at a 12.3 % pace in the third quarter, a good showing but down from a sizzling 26.2 % growth rate in the second quarter.

Government spending also contributed to third quarter GDP growth. Such spending rose at a rate of 3.7 %, following a 4.1 % pace in the second quarter.

As the economy picked up a bit of speed, so did inflation, although the rise wasn't seen as worrisome.

An inflation gauge closely watched by the Federal Reserve showed ``core'' prices _ excluding food and energy _ rose at a rate of 1.8 % in the third quarter. Although that was up from a 1.4 % pace in the second quarter, it was still within the Fed's ``comfort zone.''

Still, skyrocketing oil prices, which have reached record highs in recent days, may pose a risk to the economy. If it causes prices of other goods and services to rise, inflation could spread. If more expensive energy prices chill consumer spending, it could add to the forces threatening to slow economic activity.

The meltdown in the mortgage market has made it harder for people to obtain financing to buy homes. That's aggravating problems in the housing market and leading to a mounting pileup of unsold homes. Given that, the housing slump is expected to drag on well into next year.

The Fed's overriding worry is that problems in housing and harder-to-get credit could seriously crimp spending and investing by people and businesses, dealing a dangerous blow to the national economy. Many analysts are hopeful the economy can avoid a recession. Growth in the current October-to-December quarter is expected to slow to a pace of around 2 % or less.