Economy barely grew in 3Q

Housing slowdown takes most of blame for 1.6% rise in GDP

October 28, 2006|By Joel Havemann | Joel Havemann,LOS ANGELES TIMES

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

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

Many analysts said the relatively weak 1.6 percent growth in the third quarter represented the storm before the calm. Almost all of them forecast an upswing in the fourth quarter, although they split on whether the Fed would next raise interest rates to inhibit inflation or lower them to encourage more growth.

As a campaign issue, the economy appears to work to the advantage of the Democrats, who hope to wrest control of both the House and the Senate in the elections.

On economic stewardship, Bush's approval rating in a recent Associated Press-Ipsos poll was 40 percent, near the low for his six years in office, and more respondents said they trusted the Democrats 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 Republican leadership, said the economy had grown every quarter for the five consecutive years. "The economic fundamentals are strong," said Commerce Secretary Carlos Gutierrez.

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 percent growth in the gross domestic product, the inflation-adjusted value of everything the U.S. economy produces, was the slowest since 1.2 percent in the first quarter of 2003.

That compared with 2.6 percent growth during the previous three months and 5.6 percent 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 percent.

Investment in residential structures plunged at an annual rate of 17.4 percent in the summer months, the steepest slide since 1991. Investment in commercial structures helped offset the housing collapse by rising at a 14 percent 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 another 3.1 percent upswing in spending by the indefatigable American consumer.

After-tax income rose slightly faster than personal spending, resulting in an improvement in Americans' saving rate from a negative 0.6 percent in the second quarter to a negative 0.5 percent 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 percent in the third quarter, much lower than the 4 percent registered in second quarter.

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 percent in the spring to 2.3 percent - closer to the Fed's 1 percent to 2 percent 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.

Joel Havemann writes for the Los Angeles Times.

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