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Economy Grew 3.8% in Spring; Jobless Claims Tumble

The economy rebounded with a good head of steam in the spring before a credit crisis raised new fears about longer-term business health.

The Commerce Department reported Thursday that the economy grew at a 3.8 percent annual rate in the April-to-June quarter, the strongest showing in just over a year. Although the new reading for the second quarter was slightly less robust than a previous estimate of a 4 percent growth rate, it nonetheless marked a substantial improvement over the feeble 0.6 percent growth rate registered in the prior quarter.

The increase in the rate of growth, though, is likely to be fleeting. A deepening housing slump and a painful credit crunch since the spring has darkened the mood of individuals and businesses alike. That has led analysts to predict that economic growth has slowed considerably in the quarter that ends Sunday.

The National Association for Business Economics says it believes growth in the third quarter -- the period from July through September -- slowed to a pace of around 2.4 percent. It predicts the growth rate in the final three months of this year will be around 2.5 percent. Others think growth will turn out to be weaker than those projections.

Fears that the troubled housing market and credit problems could short-circuit the six-year-old economic expansion have shaken Wall Street. The biggest worry is that people and businesses will cut back on their spending and investment, throwing the economy into a tailspin.

Former Federal Reserve chief Alan Greenspan, in an interview with The Associated Press last week, said the odds of a recession are now higher than one-in-three but are still under 50 percent.

To help protect the economy from the ill effects of the housing slump and credit crunch, the Federal Reserve last week slashed a key interest rate. The hope is that lower rates will induce more spending and investment and thus energize overall economic activity.

Critical to the economy's outlook is the health of the jobs market.

A report released earlier this month showed that new-job creation stalled in August. The economy actually lost a net 4,000 last month, the first time that has happened in four years.

The new reading on the second quarter gross domestic product was a tad less buoyant than analysts were forecasting. They predicted growth would be lowered to a 3.9 percent pace from the 4 percent pace estimated a month ago.

Gross domestic product is the value of all goods and services produced within the United States and is considered the best barometer of the country's economic health.

The second-quarter's bounce-back came even amid the continuing strain of a housing slump.

Builders slashed spending on housing projects by 11.8 percent, on an annualized basis, in the spring. It marked the sixth quarter in a row where such spending was cut. A meltdown in the mortgage market has made it harder for people to get financing to buy homes, aggravating problems in the housing market. The number of unsold homes is skyrocketing, creating bloated inventories that builders are trying to unload. Against this backdrop, the housing slump is expected to persist well into next year.

Other businesses, though, boosted investment and spending in the second quarter on such things as equipment and software and construction of new plants, office buildings and other things. They also sold more goods to foreign buyers, helping export growth. All those factors helped power the economy in the spring.

Company profits also gained ground in the spring. One measure showed that after-tax profits rose by 5.2 percent in the second quarter, up from a 1.5 percent gain in the first quarter.

But a credit crunch, which took a turn for the worse in the third quarter, could put pressure on companies and lessen their appetite to invest. Sales of big-ticket manufactured goods plunged in August, the government reported Wednesday.

Consumers, meanwhile, took a breather in the second quarter. They boosted spending at just a 1.4 percent pace in the spring, the weakest pace in more than a year. Consumer confidence in the economy and their own financial fortunes is sagging, raising questions about their appetite to spend in the months ahead.

The free flow of credit is important to the smooth functioning of the national economy. If credit becomes too difficult to get, it can put a damper on peoples' ability to buy big-ticket items such as homes, cars and appliances. And it can crimp businesses' capital investment and hiring.

The worst housing slump in 16 years is being painfully felt. Higher interest rates squeezed homeowners, especially "subprime" borrowers with blemished credit or low incomes. Foreclosures set records and late payments spiked. Lenders were forced out of business. Hedge funds and other investors in subprime-related mortgage securities got clobbered.

All that has caused stocks on Wall Street to careen wildly in the past few months.

President Bush, meanwhile, is continuing to get low marks for his economic stewardship. Just 37 percent approve of his handling of the economy in September, down from 41 percent in August, according to an AP-Ipsos poll.

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