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Economy's growth rate slows to 1.6%

Expansion should rebound again in the fourth quarter, many analysts say. Much of the cooling is attributed to the housing slowdown.

October 28, 2006|Joel Havemann | Times Staff Writer

WASHINGTON — The slumping housing market dragged the U.S. economy into its weakest growth rate in more than three years in the third quarter, the government reported Friday in its final reading of overall economic health before the Nov. 7 congressional elections.

Inflation moderated, even without the effect of falling oil prices, but it remained higher than the Federal Reserve's "comfort zone" -- keeping alive the possibility of future interest rate hikes by the central bank.

Many analysts said the relatively weak 1.6% growth in the July-to-September period represented the storm before the calm. Almost all forecast an upswing in the final three months of the year, although they split on whether the Fed would next raise interest rates to inhibit inflation or lower them to encourage more growth.

But the weaker-than-expected growth rate unsettled stock investors, who drove the Dow Jones industrial average 73.40 points lower to close at 12,090.26, ending a string of four straight record highs. The Standard & Poor's 500 index and the Nasdaq composite index took their largest falls since Sept. 6.

As a campaign issue, the economy appears to work to the advantage of the Democrats, who hope to wrest control of the House and the Senate in the elections. On economic stewardship, Bush's approval rating in a recent Associated Press-Ipsos poll was 40%, near the low for his six years in office, and more respondents said they trusted the Democrats more than the Republicans with the economy.

Republicans put the best face on the latest economic news. House Majority Whip Roy Blunt of Missouri, who ranks third in the House GOP leadership, said the economy had grown every quarter for five consecutive years. "The economic fundamentals are strong," Commerce Secretary Carlos M. Gutierrez said.

Democrats protested that the benefits had gone largely to the wealthiest Americans, while the middle and working classes were barely treading water. They pointed out that the economy grew for nine straight years in the 1990s, with Democrat Bill Clinton in the White House for most of that time.

The Commerce Department's report showed that the 1.6% annual rate of third-quarter growth in the gross domestic product, the inflation-adjusted value of everything the U.S. economy produces, was the slowest since 1.2% in the first quarter of 2003.

That compared with 2.6% growth during the previous three months and 5.6% during the first three months of the year. The most recent growth rate also fell short of the consensus forecast of private economists, which was for about 2%.

Investment in residential structures plunged at an annual rate of 17.4% in the summer months, the steepest slide since 1991. Investment in commercial structures helped offset the housing collapse by rising at a 14% annual rate.

The nation's growing trade deficit also acted as a drag on economic growth. That the economy grew at all was due in large measure to a 3.1% upswing in spending by the indefatigable American consumer.

After-tax income rose slightly faster than personal spending, resulting in an improvement in the saving rate from a negative 0.6% in the second quarter to a negative 0.5% in the third. Americans have spent more than they have earned for about two years, thanks in large part to borrowing at low interest rates against the value of their homes.

But home values are dropping as interest rates are rising, catching consumers in a vise. John Miller, head of municipal funds management for Nuveen Investments in Chicago, said he worried that weakness in the housing market would cut into home equity lines of credit -- and retard economic growth.

The inflation news in the Commerce Department report was generally favorable. An inflation index closely watched by the Fed, which measures price changes in personal consumption, rose 2.5% in the summer quarter over the year-earlier level, much lower than the 4% registered in the spring.

Falling oil prices contributed significantly but were not the only factor. Even without volatile food and energy prices, year-over-year growth in this index fell from 2.7% in the spring to 2.3% in the summer -- closer to the Fed's 1% to 2% comfort zone but still above it.

Many economists predicted that economic growth would rebound in the final three months of this year or, at the latest, the first quarter of 2007. In a note to clients, Lehman Bros. forecast 3.2%. Goldman Sachs said it would probably revise upward its latest estimate of 2.5%.

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