Economy Strong Despite Battered Housing Sector

The U.S. economy grew at a surprisingly brisk clip in the third quarter as both consumer spending and exports showed strength despite a battered housing sector.

The gross domestic product, which measures the total output of the economy, rose 3.9 percent during the quarter, the fastest rate since the beginning of 2006. There also were signs private employers were still building up payrolls.

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Regardless, Federal Reserve policymakers still cut interest rates a quarter percentage point on Wednesday.

The GDP report showed that spending on housing construction declined for a seventh straight quarter. A separate Commerce Department report issued later -- on September construction
spending -- said total spending was up 0.3 percent in September but residential spending slumped for a 19th straight month.

Worried But Still Spending
   
Though surveys show consumer confidence has suffered as housing prices and construction withers, they still opened their wallets over the course of the summer.

Consumer spending grew at a 3 percent annual rate during the third quarter, up from 1.4 percent in the second quarter, a powerful stimulant since consumers fuel about two-thirds of
national economic activity through their purchases of goods and services.

Stock prices were up moderately at midday while bond prices remained under pressure as investors grew more cautious about chances for interest-rate cuts amid a flood of positive news.

The Labor Department said employment costs -- a key determinant of the costs of production and potentially of inflation -- rose a smaller-than-expected 0.8 percent in the third quarter, down from 0.9 percent in the second quarter.

And separately, a closely watched report from ADP Employer Services estimated that private employers added 106,000 jobs in October. The private employment service's estimate was well
ahead of forecasts among economists surveyed by Reuters for 60,000 jobs and implied the economy had more underlying strength than many had previously thought.0

Some Weak Spots

There were a few signs of stress.

A report from the National Association of Purchasing Management said its Chicago business barometer fell to 49.7 in October from 54.2 in September, its first drop since February.

Also, US crude oil futures surged almost $4 to top $94 -- a threat to costs throughout the economy as well as to consumers who face steadily rising prices at the
gasoline pump.

The GDP report showed exports jumped in the third quarter at a 16.2 percent rate, the strongest increase since the fourth quarter of 2003 and a sign that a falling U.S. dollar is making American-made goods cheaper and more attractive to foreigners.

Prices rose more rapidly in the third quarter, with the so-called core index of personal consumption expenditures, which excludes food and energy items, climbing at a 1.8 percent
rate. That compared with 1.4 percent in the second quarter and begins to push the boundary of the 1-to-2 percent rate for core price increases that is widely considered to be acceptable to Fed policy-makers.

Inventories of unsold goods also accelerated in the third quarter, to an annual rate of $15.7 billion compared with $5.8 billion in the second quarter.

Some of the build-up may represent stocking up for the coming holiday season between Thanksgiving and Christmas although inventories may also accumulate if sales of some goods
begin to lag. In either case, however, rising inventories add to growth in the period in which they occur.

Business Turns Cautious

While consumers spent relatively freely in the third quarter, businesses became more cautious. Business investment increased at a 7.9 percent annual rate, down from 11 percent in the second quarter.

The deterioration in housing gathered steam. Spending on residential construction plummeted at a 20.1 percent rate in the third quarter, far ahead of the 11.8 percent rate of decline in the second quarter and a seventh straight quarter in which residential spending has fallen.

A weakening U.S. dollar has made American-made products cheaper for foreigners to buy and appears to be benefiting exporters. Imports also rose in the third quarter, up 5.2 percent after contracting 2.7 percent in the second quarter.

Inventories of unsold goods also accelerated in the third quarter, to an annual rate of $15.7 billion compared with $5.8 billion in the second quarter.

Some of the build-up may represent stocking-up for the coming holiday season between Thanksgiving and Christmas although inventories may also accumulate if sales of some goods
begin to lag. In either case, however, rising inventories add to growth in the period in which they occur.

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