Economy in the U.S. slams on the brakes
Economy in the U.S. slams on the brakes
By Jeremy W. Peters
Copyright by The New York Times
Published: October 27, 2006
NEW YORK The U.S. economy grew more slowly in the third quarter than at any time since early 2003, held back by a deflating housing market, the Commerce Department reported Friday,
The total output of goods and services in the United States expanded at an annual rate of just 1.6 percent in the three months ended Sept. 30. That preliminary estimate compares with a revised rate of 2.6 percent in the second quarter and the robust 5.6 percent rate recorded in the first. The figures are seasonally adjusted.
The slowdown in the third quarter was worse than economists were expecting. The consensus forecast compiled by Bloomberg News was for 2 percent growth.
Stocks in New York skidded on the news, with major indexes falling. The Dow Jones industrial average declined 73.40 points to 12,090.26.
Yet to some extent, the U.S. economy is still acting as a global engine of growth. In the third quarter, the growing U.S. trade deficit reduced domestic economic growth by 0.58 percentage point - transferring this demand to producers in other countries.
This has added to vigorous global output. Last month, the International Monetary Fund forecast that global output would grow 5.1 percent this year, up from 4.8 percent in 2005.
But as the U.S. economy slows, economists expect that its contribution to growth overseas will decline.
"Trade numbers should improve because world growth is faster than U.S. growth," said David Kelly, economic advisor at Putnam Investments in Boston. The IMF expects global growth to slow somewhat, to 4.9 percent next year.
A major question hanging over both the U.S. economy - and the Congressional elections this autumn - has been just how severely the slump in housing would drag down growth. The Commerce Department's report, which will be revised twice in coming months as more complete data become available, shows that the drag was indeed substantial.
Residential construction fell by nearly one-fifth in the quarter, the steepest decline in 15 years. That trend alone knocked 1.1 percentage point off the overall figure for economic growth. As recently as the spring of 2005, that sector was a major motor of growth, adding more than one percentage point to the overall figure.
With the economy shifting into low gear, analysts said they thought that the Federal Reserve would be unlikely to resume raising interest rates soon. The Fed paused in August after a two- year campaign of steady increases in its benchmark overnight lending rate, meant to combat inflation. It has kept the rate steady at 5.25 percent through three policy-setting meetings since then, even though the inflation rate has remained stubbornly high.
The majority view at the Fed is that the economy is already on a slowing trend that will bring inflation to heel, and the new report supports that view.
A closely watched measure of inflation in the report Friday, the GDP price index, rose at a 1.8 percent annual rate in the third quarter, seasonally adjusted, compared with 3.3 percent in the first and second quarters. Falling fuel prices helped bring the rate down.
With midterm Congressional elections less than two weeks away, the new figures offer something for both Republicans and Democrats to cheer. The weak growth rate suggests that the economy is not as robust as it once was, bolstering Democrats' criticism of the Bush administration's economic policies. But the report also finds consumer spending gaining strength, rising 3.1 percent in the third quarter, compared with 2.6 percent in the second.
Increasingly, American consumers are growing more confident. A report issued Friday by the University of Michigan found that consumer confidence rose in October to the highest level in more than a year. Falling gasoline prices were the main reason.
Analysts are now wondering where the economy goes from here.
"The bigger question is what happens in 2007," Nigel Gault, an economist with Global Insight, wrote in a note to clients. "As the declines in residential construction ease, does the economy bounce back to trend growth (3 percent) or above, or does the weakness in housing begin to affect the rest of the economy?"
Eduardo Porter contributed to this report.
By Jeremy W. Peters
Copyright by The New York Times
Published: October 27, 2006
NEW YORK The U.S. economy grew more slowly in the third quarter than at any time since early 2003, held back by a deflating housing market, the Commerce Department reported Friday,
The total output of goods and services in the United States expanded at an annual rate of just 1.6 percent in the three months ended Sept. 30. That preliminary estimate compares with a revised rate of 2.6 percent in the second quarter and the robust 5.6 percent rate recorded in the first. The figures are seasonally adjusted.
The slowdown in the third quarter was worse than economists were expecting. The consensus forecast compiled by Bloomberg News was for 2 percent growth.
Stocks in New York skidded on the news, with major indexes falling. The Dow Jones industrial average declined 73.40 points to 12,090.26.
Yet to some extent, the U.S. economy is still acting as a global engine of growth. In the third quarter, the growing U.S. trade deficit reduced domestic economic growth by 0.58 percentage point - transferring this demand to producers in other countries.
This has added to vigorous global output. Last month, the International Monetary Fund forecast that global output would grow 5.1 percent this year, up from 4.8 percent in 2005.
But as the U.S. economy slows, economists expect that its contribution to growth overseas will decline.
"Trade numbers should improve because world growth is faster than U.S. growth," said David Kelly, economic advisor at Putnam Investments in Boston. The IMF expects global growth to slow somewhat, to 4.9 percent next year.
A major question hanging over both the U.S. economy - and the Congressional elections this autumn - has been just how severely the slump in housing would drag down growth. The Commerce Department's report, which will be revised twice in coming months as more complete data become available, shows that the drag was indeed substantial.
Residential construction fell by nearly one-fifth in the quarter, the steepest decline in 15 years. That trend alone knocked 1.1 percentage point off the overall figure for economic growth. As recently as the spring of 2005, that sector was a major motor of growth, adding more than one percentage point to the overall figure.
With the economy shifting into low gear, analysts said they thought that the Federal Reserve would be unlikely to resume raising interest rates soon. The Fed paused in August after a two- year campaign of steady increases in its benchmark overnight lending rate, meant to combat inflation. It has kept the rate steady at 5.25 percent through three policy-setting meetings since then, even though the inflation rate has remained stubbornly high.
The majority view at the Fed is that the economy is already on a slowing trend that will bring inflation to heel, and the new report supports that view.
A closely watched measure of inflation in the report Friday, the GDP price index, rose at a 1.8 percent annual rate in the third quarter, seasonally adjusted, compared with 3.3 percent in the first and second quarters. Falling fuel prices helped bring the rate down.
With midterm Congressional elections less than two weeks away, the new figures offer something for both Republicans and Democrats to cheer. The weak growth rate suggests that the economy is not as robust as it once was, bolstering Democrats' criticism of the Bush administration's economic policies. But the report also finds consumer spending gaining strength, rising 3.1 percent in the third quarter, compared with 2.6 percent in the second.
Increasingly, American consumers are growing more confident. A report issued Friday by the University of Michigan found that consumer confidence rose in October to the highest level in more than a year. Falling gasoline prices were the main reason.
Analysts are now wondering where the economy goes from here.
"The bigger question is what happens in 2007," Nigel Gault, an economist with Global Insight, wrote in a note to clients. "As the declines in residential construction ease, does the economy bounce back to trend growth (3 percent) or above, or does the weakness in housing begin to affect the rest of the economy?"
Eduardo Porter contributed to this report.
posted by Carlos T Mock @ 2:25 PM
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