Economy Sprints Ahead in the Summer but Is Expected to Limp in Final 3 Months of Year.
The economy sprinted ahead at its fastest pace in four years during the summer, although it is expected to limp through the final three months of this year as housing and credit woes weigh on individuals and businesses.
The Commerce Department reported Thursday that the gross domestic product grew at a 4.9 percent pace in the July-to-September period, unchanged from an estimate a month ago. The performance was impressive given that the housing market plunged deeper into despair. Builders slashed spending on housing projects in the third quarter at an annualized rate of 20.5 percent, the most in 16 years.
Economic growth in October through December is expected to have slowed to a pace of just 1.5 percent or less. Some analysts fear that economic activity might even contract slightly. Gross domestic product measures the value of all goods and services produced in the United States. "The economy is slowing down so fast this quarter you can see the skid marks as it slams on the brakes," said Stuart Hoffman, chief economist at PNC Financial Services Group.
The big worry is that people will cut back on spending and throw the economy into a recession. Former Federal Reserve Chairman Alan Greenspan and others say the odds of that happening have grown this year. Greenspan recently warned that the economy is "getting close to stall speed."
To rescue the economy, Fed Chairman Ben Bernanke and his colleagues have sliced a key interest rate three times this year; those moves dropped that rate to 4.25 percent, a two-year low. Still, Bernanke has been criticized for not moving more quickly and aggressively to deal with the problems.
The collapse of the once high-flying housing market, couple with a mortgage meltdown and a painful credit crunch, have driven home foreclosures to record numbers. The problems have resulted in multibillion-dollar losses or banks and other financial companies and unnerved Wall Street. The Bush administration and the Democrat-controlled Congress accuse each other of not doing enough.
Wall Street was in a better mind-set Thursday, however. The Dow Jones industrials gained 38.37 points to close at 13,245.64.
Credit problems have made it harder for people to get financing to buy a home. The inventory of unsold homes continues to pile up, forcing builders to cut back even deeper on construction projects. Home foreclosures and late payments are expected to worsen. The troubles in housing are expected to continue well into next year, acting as a weight on economic activity.
In the third quarter, the housing slump lopped a sizable 1.08 percentage point off GDP. Analysts expect the ailing housing market to be a drag on economic activity in the months ahead. Whether the economy manages to avoid a recession will depend largely on how consumers and the employment situation hold up.
Another report showed that more people signed up for unemployment benefits last week, suggesting that the job market is softening. The Labor Department reported that new applications filed for jobless benefits rose by 12,000 to 346,000. It was a larger increase than economists expected. They were forecasting claims to rise to 335,000 last week.
Also, a report from the Conference Board showed a gauge of future business activity fell 0.4 percent in November, its lowest reading in more than two years. It suggested the economy's slowdown will persist into early 2008.
Consumer spending grew at a lukewarm pace of 2.8 percent in the third quarter, compared with the 2.7 percent reported a month ago. Consumer spending, however, is expected to grow cooler in the final three months of this year, economists say.
So far, the job market, while slowing down, hasn't fallen to pieces. The unemployment rate, now at 4.7 percent, is expected to climb to 5 percent by early next year as the economy loses speed. Should the job market abruptly lose momentum, consumers could be spooked and snap shut their wallets and pocketbooks.
"The last major pillar supporting economic growth -- consumer spending -- may soon start to buckle," warned Bernard Baumohl, managing director of the Economic Outlook Group.
Businesses, largely carried the economy in the third quarter. Sales of U.S. exports abroad powered growth. Exports grew by 19.1 percent, on an annualized basis, the most in four years, and even better than previously estimated. Those sales were aided by the falling value of the dollar, which makes U.S. goods cheaper to buy on foreign markets.
A separate GDP-related gauge of inflation showed that "core" prices -- excluding food and energy -- increased at a rate of 2 percent in the third quarter, up sharply from a 1.4 percent pace in the second quarter. The new third-quarter core inflation reading was higher than a 1.8 percent growth rate estimated a month ago. The 2 percent reading was at the upper bound of the Fed's comfort zone for inflation.
That pickup suggested that high energy prices are pushing up the prices of other goods and services. High energy prices are a double-edged sword. They can put a damper on growth and also stoke inflation, which would be a dangerous combination for the economy.
The situation could complicate the Fed's job of trying to keep the economy growing, while making sure that inflation is under control. The central bank's bracing tonic for weakening economic growth is lowering its key interest rate, while the remedy for inflation is raising its key rate.
The economy sprinted ahead at its fastest pace in four years during the summer, although it is expected to limp through the final three months of this year as housing and credit woes weigh on individuals and businesses.
The Commerce Department reported Thursday that the gross domestic product grew at a 4.9 percent pace in the July-to-September period, unchanged from an estimate a month ago. The performance was impressive given that the housing market plunged deeper into despair. Builders slashed spending on housing projects in the third quarter at an annualized rate of 20.5 percent, the most in 16 years.
Economic growth in October through December is expected to have slowed to a pace of just 1.5 percent or less. Some analysts fear that economic activity might even contract slightly. Gross domestic product measures the value of all goods and services produced in the United States. "The economy is slowing down so fast this quarter you can see the skid marks as it slams on the brakes," said Stuart Hoffman, chief economist at PNC Financial Services Group.
The big worry is that people will cut back on spending and throw the economy into a recession. Former Federal Reserve Chairman Alan Greenspan and others say the odds of that happening have grown this year. Greenspan recently warned that the economy is "getting close to stall speed."
To rescue the economy, Fed Chairman Ben Bernanke and his colleagues have sliced a key interest rate three times this year; those moves dropped that rate to 4.25 percent, a two-year low. Still, Bernanke has been criticized for not moving more quickly and aggressively to deal with the problems.
The collapse of the once high-flying housing market, couple with a mortgage meltdown and a painful credit crunch, have driven home foreclosures to record numbers. The problems have resulted in multibillion-dollar losses or banks and other financial companies and unnerved Wall Street. The Bush administration and the Democrat-controlled Congress accuse each other of not doing enough.
Wall Street was in a better mind-set Thursday, however. The Dow Jones industrials gained 38.37 points to close at 13,245.64.
Credit problems have made it harder for people to get financing to buy a home. The inventory of unsold homes continues to pile up, forcing builders to cut back even deeper on construction projects. Home foreclosures and late payments are expected to worsen. The troubles in housing are expected to continue well into next year, acting as a weight on economic activity.
In the third quarter, the housing slump lopped a sizable 1.08 percentage point off GDP. Analysts expect the ailing housing market to be a drag on economic activity in the months ahead. Whether the economy manages to avoid a recession will depend largely on how consumers and the employment situation hold up.
Another report showed that more people signed up for unemployment benefits last week, suggesting that the job market is softening. The Labor Department reported that new applications filed for jobless benefits rose by 12,000 to 346,000. It was a larger increase than economists expected. They were forecasting claims to rise to 335,000 last week.
Also, a report from the Conference Board showed a gauge of future business activity fell 0.4 percent in November, its lowest reading in more than two years. It suggested the economy's slowdown will persist into early 2008.
Consumer spending grew at a lukewarm pace of 2.8 percent in the third quarter, compared with the 2.7 percent reported a month ago. Consumer spending, however, is expected to grow cooler in the final three months of this year, economists say.
So far, the job market, while slowing down, hasn't fallen to pieces. The unemployment rate, now at 4.7 percent, is expected to climb to 5 percent by early next year as the economy loses speed. Should the job market abruptly lose momentum, consumers could be spooked and snap shut their wallets and pocketbooks.
"The last major pillar supporting economic growth -- consumer spending -- may soon start to buckle," warned Bernard Baumohl, managing director of the Economic Outlook Group.
Businesses, largely carried the economy in the third quarter. Sales of U.S. exports abroad powered growth. Exports grew by 19.1 percent, on an annualized basis, the most in four years, and even better than previously estimated. Those sales were aided by the falling value of the dollar, which makes U.S. goods cheaper to buy on foreign markets.
A separate GDP-related gauge of inflation showed that "core" prices -- excluding food and energy -- increased at a rate of 2 percent in the third quarter, up sharply from a 1.4 percent pace in the second quarter. The new third-quarter core inflation reading was higher than a 1.8 percent growth rate estimated a month ago. The 2 percent reading was at the upper bound of the Fed's comfort zone for inflation.
That pickup suggested that high energy prices are pushing up the prices of other goods and services. High energy prices are a double-edged sword. They can put a damper on growth and also stoke inflation, which would be a dangerous combination for the economy.
The situation could complicate the Fed's job of trying to keep the economy growing, while making sure that inflation is under control. The central bank's bracing tonic for weakening economic growth is lowering its key interest rate, while the remedy for inflation is raising its key rate.
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