BF2S Forums US economy posts weak growth in 3Q, watch for election impact

Chicago Trib wrote:

Sluggish economy rises 1.6%
Housing slowdown blamed for weak growth

By James P. Miller
Tribune staff reporter
Published October 28, 2006

The U.S. economy, dragged down by the free-fall in the housing sector, managed only a weaker-than-expected 1.6 percent annualized growth rate in the third quarter, the Commerce Department reported Friday.



That performance, the economy's slowest expansion in 3 1/2 years, was more muted than the lethargic 2.0 percent most experts had been expecting for growth in the nation's gross domestic product. And the principal reason for the shortfall wasn't hard to find.

"Growth was hit by the buzz saw of markedly weaker housing, as residential investment plunged at a 17.4 percent rate on the heels of an already sharp 11.1 percent dive in the prior quarter," said BMO Nesbitt Burns economist Douglas Porter.

An economic slowdown is well under way, said Ken Mayland of Clear View Economics, and it "clearly has farther to go."

But while the latest GDP figure is likely to boost fears that the U.S. is on the verge of a recession, he predicted the current economic easing will ultimately "prove to be a midcourse breather in a longer expansion, not the end to the expansion."

Wall Street clearly interpreted the disappointing report as evidence that the economy is in deeper trouble than had previously been thought, with the Dow Jones industrial average tumbling 73.40 points, to 12,090.26. Financial-futures traders increased their bets that the Federal Reserve will seek to stimulate the economy by lowering interest rates next spring.

"The report reduced inflation fears, but it also increased worries that growth is slowing too much, which could impact corporate earnings," A.G. Edwards market strategist Alfred Goldman said of the drop in stocks.

A number of observers suggested that beneath the admittedly soggy GDP reading, lots of evidence of fundamental economic strength could be found.

"We are feeling the effects of the housing bubble bursting, and while the ill wind is not pleasant, it is not likely to be long lasting," said Joel Naroff of Naroff Economic Advisors.

Danske Bank analyst Peter Possing Andersen saw "robust" growth in consumer and business spending. He said he continues to forecast that GDP growth will rebound to about 3.4 percent in the current quarter.

David Huether, chief economist of the National Association of Manufacturers, sounded a similar upbeat theme.

"Excluding residential investment, the economy grew by 2.7 percent" in the latest quarter, he said, noting that consumer spending, business capital-equipment investment and exports all remained solid.

Over the past 12 months, GDP growth has averaged 2.9 percent. That includes an anemic, hurricane-battered 1.8 percent reading in the final quarter of 2005, followed by an unsustainably strong 5.6 percent jump in the first quarter of 2006.

In this year's second quarter, GDP growth was a relatively listless 2.6 percent, as the Fed's two-year-long campaign of higher interest rates began to pinch the economy. The Fed paused its long series of rate hikes in August, and on Wednesday opted to keep rates unchanged again.

For investors and economists, the question now is whether the economy will shake off the housing sector's woes and continue to grow into the new year, albeit at a slower rate, or whether housing's difficulties seep into the broad economy and send the U.S. into a painful economic retrenchment.

"While growth looks set to rebound a bit in the fourth quarter, the economy is now expanding at a pace that is slightly below potential, largely due to the impact of higher interest rates on the housing market," said economist Augustine Faucher of Moody's Economy.com.

Growth will remain below potential through the middle of next year, he predicted, and that will gradually bring down inflationary pressures, as the Fed has been seeking to do.

The central bank is likely to hold interest rates steady into the spring of 2007, Faucher believes, and then will begin "loosening monetary policy as inflation slows."

The quarterly GDP report is always a high-profile piece of economic data, even the preliminary reports, such as the one released Friday, which are followed the next two months by a revised report and then a final report. And with midterm elections nearly at hand, the latest measure of the economy's health got a hard political spin from both parties.

Sen. Jack Reed of Rhode Island, ranking Democrat on the Joint Economic Committee of Congress, said the GDP report "undercuts the president's claim that his tax cuts are working," and offers evidence that "we need a new direction in policy to create an economy that works for all Americans."

But the Bush administration downplayed the slowdown as predictable and temporary.

Commerce Secretary Carlos Gutierrez stressed that "although there was a correction in housing, which we expected, the economic fundamentals are strong."

However, what the soft GDP data appear to most clearly demonstrate is the success of the Fed's effort to damp down inflationary pressures.

The Commerce Department report, First Trust Advisors economist Brian Wesbury told investors, paints a picture of "a strong engine with a few dents and dings in the hood."

In contrast to many economists, Wesbury predicts the economy will grow 3 percent to 4 percent in the current quarter and the first quarter of 2007, and that "the next move by the Fed will be a rate hike."