Economy Grew at Faster 2.2% Rate in Third Quarter, Government Says

The economy grew faster than first thought in third quarter on strong business investment, even as the housing sector posted its biggest decline in more than 15 years, the government said.

"The economy is growing at a slow pace, but not at a negative pace," said Ed Keon, chief investment strategist at Prudential Equity Research, in an interview on CNBC's Power Lunch. "Although inflationary pressures remain, it looks like the pressures are easing rather than growing, so I think a soft landing is the most likely scenario."

There was support for this view not only in the revised gross domestic product figures released today, but also in commentary released in the Federal Reserve's Beige Book this afternoon.

GDP, which measures total U.S. economic activity, expanded at a 2.2% annual rate during the third quarter, higher than the 1.6% gain first estimated last month and above economists' average forecast of a 1.8% gain.

The third-quarter gain was still weaker than the 2.6% advance in the second quarter.

Meanwhile, a key measure of core inflation - personal spending excluding food and energy - was revised a tenth of a percentage point lower, to 2.2%, down slightly from the 2.3% first estimated and close to Wall Street expectations.

The Commerce Department said that new-home sales fell a more-than-expected 3.2% in October. That was the largest drop since July, when home sales plunged by 9.2%.

Home prices, meanwhile, rose in October after falling sharply in September.

"In general, the message is we are looking at an economy that is growing at a below trend rate," said Michelle Girard, senior economist at RBS Greenwich Capital, also on Power Lunch. "We have housing and autos correcting. Both are drags on growth."

However, Girard noted, what really matters to most investors is where the economy emerges in 2007 once the economy moves past these corrections, and nothing that Girard is seeing in the data makes her worry about growth next year.

Conrad DeQuadros, senior economist at Bear Stearns, said he expects economic growth to be somewhat soft in the fourth quarter, but then growth should start to rebound.

The Beige Book, which is composed of reports from the ares covered by Federal Reserve Banks around the country, found most areas of the U.S. were seeing moedera economic growth through the first weeks of November. Labor markets also remained tight in many regions.

Growth accelerated in the districts of the New York and Richmond Fed banks, but slowed from a high level in the Dallas region and was mixed in the Atlanta district, the Fed said.

Yesterday, Fed Chairman Ben Bernanke said he will be monitoring inflation, which has showed signs of improving in recent months as once surging energy prices have calmed down. Many investors interpreted his remarks to mean that the Fed isn't likely to cut interest rates anytime soon.

The Fed has kept its benchmark rate unchanged at 5.25% for three consecutive meetings after raising it 17 times in a row. Rate-setters will be carefully watching incoming economic data before deciding whether to an additional rate hike will be needed at their Dec. 12 meeting.

This morning's GDP report showed business investment was stronger than first thought during the third quarter. The Commerce Department report was the second estimate of the third-quarter figures after an initial report issued last month.

Nonresidential investment, which serves as a proxy for business spending, rose at a 10% annual rate, up from the 8.6% rise first estimated. Corporate profits during the quarter, after taxes, advanced by 4.6%. That was far above the scant 0.3% advance in the second quarter and surprisingly higher than the 0.4% gain economists in a Reuters poll were expecting.

Investment in housing tumbled by 18% during the quarter, a slightly bigger decline than the 17.4% decrease in the government's earlier estimate. It was the biggest decline since a 21.7% slide in the first quarter of 1991.

Consumer spending, which accounts for roughly two-thirds of national economic activity, advanced at a 2.9% annual rate during the quarter, a weaker reading than the 3.1% advance first estimated.

So-called core prices, measured on a year-over-year basis were up 2.4%, the same as first estimated and the strongest rate since 1995.