Housing weakness bashes down GDP

Friday, October 27th, 2006

USA Today

WASHINGTON (Reuters) — A slumping housing sector helped slow economic growth in the third quarter to its weakest pace in more than three years, the Commerce Department reported Friday.

Gross domestic product, which measures total economic activity within U.S. borders, expanded at a 1.6% annual rate during the third quarter, down from 2.6% annual rate in the second quarter for the slowest advance since 1.2% in the first quarter of 2003.

Third-quarter GDP growth was well below Wall Street analysts’ forecasts for a 2.2% rate of growth and reflected a range of influences that combined to slow the economy. Most striking was a 17.4% annual rate of contraction in spending on new housing — the biggest decline in 15½ years, since a 21.7% drop in the first quarter of 1991.

By contrast, the GDP report showed that business investment remained healthy and consumers picked up their spending pace, giving credence to forecasts that the economy retains enough vigor to keep growing at least at a moderate rate.

The drag on growth from a rapidly softening housing sector was expected, because other reports have shown prices are weakening for both new and existing homes and builders are offering incentives to try to reduce their inventories of unsold homes.

Non-residential investment, which serves as a proxy for business spending, rose at an 8.6% annual rate in the third quarter, close to double the second quarter’s 4.4%. Consumer spending, which accounts for roughly two-thirds of national economic activity, increased at a 3.1% annual rate, up from 2.6% in the second quarter.

Another eport Friday said consumer sentiment improved more than expected in October as consumers’ view of both future and current conditions improved.

The final October reading of the University of Michigan’s consumer sentiment index was 93.6, up from a preliminary 92.3 and September’s final reading of 85.4, said sources who saw the subscription-only report. The median forecast of economists polled by Reuters was for a final October reading of 92.5.

The White House said it is not worried about the slowdown in economic growth.

“Everybody expected this. You have a combination of rising energy prices and also rising interest rates, and now you’ve seen a reverse on both,” said White House press secretary Tony Snow.

The news was mixed on prices.

A gauge favored by the Federal Reserve — personal spending excluding food and energy — increased at a 2.3% annual rate during the third quarter, slower than the 2.7% posted during the second quarter.

But this gauge, measured on a year-over-year basis, was up 2.4% in the third quarter, which department officials said was the strongest rate since 1995.

Energy prices, which had surged in the summer, have since calmed down.

Gas prices are now hovering around $2.23 a gallon nationwide, compared with more than $3 a gallon in early summer. Oil prices are now just over $61 a barrel, down from $77.03, a record high close in mid-July.

That is supposed to help ease inflation and lead to better economic activity.

Lower energy prices leave people and companies with more money to spend on other things. If they spend and invest, that adds to economic growth. Many economists believe the economy will do better in the current October-to-December quarter, perhaps clocking in close to 3%.

The Fed highlighted its continuing concern over potential inflation pressures when it announced Wednesday that it was keeping interest rates steady for now, but it remained watchful about price rises.

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