Economy grows by 2.2 percent in third quarter, better than first thought

WASHINGTON (AP) _ Business growth slowed to a 2.2 percent pace in the late summer, a much better performance than anticipated and an encouraging sign that the housing slump hasn't been too much of

Wednesday, November 29th 2006, 9:48 am

By: News On 6

WASHINGTON (AP) _ Business growth slowed to a 2.2 percent pace in the late summer, a much better performance than anticipated and an encouraging sign that the housing slump hasn't been too much of a drag on the economy.

The upgraded reading on gross domestic product, released by the Commerce Department Wednesday, was considerably stronger than the 1.6 percent growth rate for the July-to-September quarter that had been estimated a month ago. That pace had been the worst in more than three years.

Gross domestic product measures 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 new estimate, which was stronger than the 1.8 percent pace that economists had forecast, nevertheless marked the slowest pace of growth since the end of last year when the economy was reeling from the blows of the Gulf Coast hurricanes. The biggest drag on third-quarter growth: the cooldown in the once-sizzling housing sector.

Investment in home building was cut by the largest amount in 15 years in the third quarter.

In a separate report, new-home sales fell by 3.2 percent in October, another sign of the housing slowdown. Home prices, however, rose.

The upgraded reading on third-quarter GDP largely reflected stronger inventory building by businesses and a trade deficit that was less of a weight on economic growth than initially thought.

The improvement, however, doesn't change the overall picture of the economy's performance: It has been losing momentum all year long.

In the first quarter the economy grew at a blistering pace of 5.6 percent, its strongest growth spurt in 2 1/2 years. In the second quarter, though, growth slowed to 2.6 percent pace, mostly reflecting caution by consumers and businesses in response to surging energy prices.

The Bush administration insists the economy is in fundamentally good shape and most Americans are better off. Democrats argue that the poor and the middle class have reaped few benefits from the five-year old economic expansion. Democrats who will take over the House and Senate for the 110th Congress starting in January want to raise the federal minimum wage, among other priorities.

Consumers and businesses did their part keeping the economy moving in the third quarter.

Consumers boosted spending at a 2.9 percent pace. That was slightly less than first estimated but stronger than the 2.6 percent growth rate registered in the second quarter.

Businesses ramped up investment in equipment and software at 7.2 percent pace, a turnaround from the 1.4 percent rate of decline in the prior quarter. Investment in new plants, office buildings and other commercial construction grew at a brisk rate of 16.7 percent, following a 20.3 percent growth rate in the second quarter.

Companies' profits gained ground in the third quarter. One measure of after-tax profits in the GDP report showed that profits rose by 4.6 percent, up from a small 0.3 percent increase in the second quarter.

All that helped to cushion the hit to the economy from the housing slump. Builders cut spending on home building at a 18 percent annual rate, the most in 15 years. That sliced 1.16 percentage points off third-quarter GDP, the most in nearly 25 years.

Even with the slowdown in the third quarter, most economists don't believe the economy is in danger of tipping into recession. But they do think the economy is in for a spell of lethargic activity in the months ahead.

The National Association for Business Economics now predicts the economy will grow at a 2.5 percent pace in the final three months of this year.

Federal Reserve Chairman Ben Bernanke, in a mostly positive assessment of the economy's outlook on Tuesday, said the economic slowdown "appears to be taking place roughly along the lines envisioned."

Outside housing and autos, economic activity remains solid, he said. "Overall, the economy is likely to expand at a moderate pace going forward," Bernanke said.

The Fed's goal is to slow the economy sufficiently to thwart inflation but not so much that it slides into recession.

The central bank has left interest rates alone since August and is expected to again stay on the sidelines at its last meeting of this year on Dec. 12. The Fed's pause came after it had boosted interest rates for more than two years to fend off inflation.

An inflation gauge tied to the GDP report showed that core prices _ excluding food and energy _ advanced at a rate of 2.2 percent in the third quarter. That was slightly lower than a previous estimate and was down from a 2.7 percent pace in the second quarter.

Energy prices, which had soared in the summer, have since settled down.

Even with the slowing in overall economic growth, the jobs climate is still fairly healthy.

The nation's unemployment rate sank to a five-year low of 4.4 percent in October and workers' wages grew solidly.