Housing Slump Holding Back Economic Growth

Economic growth slowed to a 2 percent pace in the late summer, more sluggish than previously thought, as the real-estate bust weighed on overall business activity.

The new reading on gross domestic product for the July-to-September quarter marked a slight downgrade from the 2.2 percent annual rate estimated a month ago, the Commerce Department reported Thursday.

The economy has been losing momentum all this year. The main culprit behind the third quarter's slowdown was the deepening housing slump.

Investment in home building was slashed at an 18.7 percent rate — even more than previously estimated, and the largest cut in 15 years. That shaved 1.2 percentage points off third-quarter growth, the most in nearly 25 years.

Economists were expecting the government's old GDP estimate of 2.2 percent growth for the third quarter to hold.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic health.

In other economic news, the number of newly laid-off workers signing up for unemployment benefits rose by 9,000 to 315,000 last week, the Labor Department reported. That was in line with economists' projections.

The Conference Board, meanwhile, reported that a gauge of future economic activity advanced 0.1 percent in November, suggesting that the economy will continue to expand in the coming months. That showing also was in line with analysts' expectations.

The new GDP figure underscores just how much speed the economy has lost this year as the crumbling housing market, the toll of the Federal Reserve's two-year credit tightening campaign and once-surging energy prices have crimped economic activity.

In the first three months of this year, the economy grew at a hot 5.6 percent pace, the strongest spurt in 2½ years. However, in the second quarter, growth slowed to a 2.6 percent pace as galloping energy prices and the impact of higher borrowing costs turned consumers and businesses cautious.

Many economists believe the economy stayed lethargic in the current October-to-December period. Forecasts range from a pace of around 1.7 percent to 2.5 percent.

Even with expectations that economic activity will continue to be sub-par in the months ahead, most analysts don't expect the economy to fall into recession.

Republicans and Democrats have differing views on the extent to which Americans have benefited from the economic expansion over the last five years.

A top priority for the Democrat-controlled Congress, which convenes in January, will be raising the federal minimum wage from $5.15 an hour to $7.25 an hour. It hasn't gone up in nearly 10 years.

Americans gave President Bush lower marks for his economic stewardship. The president's approval rating on the economy sank to 38 percent in December, down from 43 percent in November, according to an AP-Ipsos poll.

In the third quarter, consumers boosted their spending at a 2.8 percent pace. That was a tad less than previously estimated and was a factor in the third-quarter GDP figure being marked down from last month's estimate. Still, consumers in the third quarter were spending at a slightly better pace than they did in the second quarter.

Business spending on equipment and software, meanwhile, rose at an annual rate of 7.7 percent, stronger than previously thought. Investment in new plants and buildings increased at a brisk pace of 15.7 percent in the third quarter, less than estimated a month ago.

Companies' profits gained ground in the third quarter. One measure showed after-tax profits rising by 4.2 percent. Although that was slightly less than previously estimated, it nevertheless marked a big improvement from the meager 0.3 percent increased logged in the prior quarter.

With corporate profits growing, companies have stayed in a good hiring groove even as overall economic growth has slowed. The nation's unemployment rate stands at 4.5 percent, considered low by historical standards.

As the economy has slowed so has inflation.

An inflation gauge tied to the GDP report showed that core prices — excluding food and energy — rose at a rate of 2.2 percent in the third quarter, unchanged from a previous estimate. That was better than the 2.7 percent pace in the second quarter. Energy prices, which had soared in the summer, have since calmed down.

Even with the improvement, though, core inflation is still higher than the Fed would like to see. The Fed, however, predicts that core inflation will move lower in the months ahead as economic growth remains subdued.

Against that backdrop, the central bank has felt comfortable holding interest rates steady, which it has done since August. Before that, the Fed had steadily boosted rates for two years to fend off inflation.

The Fed's goal is to slow the economy enough to thwart inflation — but not so much as to cripple economic activity.