US growth slows as housing slump begins to bite

WASHINGTON: Economic growth in the US slowed in the third quarter to a 2% annual rate, dragged down by the biggest decline in home building in 15 years.

The government’s final estimate of growth in gross domestic product, the value of all goods and services produced, was down from the 2.2% rate estimated last month and compares with 2.6% for the second quarter, the Commerce Department said on Thursday in Washington. A measure of core inflation was unchanged from the previous estimate.

Home construction declined by the most since 1991, and consumer spending on medical services was less than previously reported, the Commerce Department said. Federal Reserve policy makers last week forecast a moderate expansion “on balance over coming quarters” and called recent economic indicators ‘mixed.’

“The big picture is really unchanged, which is of an economy where the decline in residential construction is a huge drag on overall growth, but where the spillover effects to the rest of the economy have been limited,” said Nigel Gault, director of US research at Global Insight in Boston.

Economists expected the final estimate for third quarter growth to be 2.2%, according to the median of 67 forecasts in a Bloomberg News survey. Projections ranged from 2% to 2.4%. A separate government report showed first-time applications for state unemployment benefits in the US rose last week while staying at a level that points to strength in the labor market. Initial jobless claims rose 9,000 to 3,15,000 in the week that ended December 16 from 3,06,000 the prior week, the Labor Department said.

US Treasury yields were little changed after the reports, with the benchmark 10-year Treasury note yielding 4.59%, down 1 basis point from Wednesday.

Consumer spending, which accounts for almost 70% of the economy, expanded at a 2.8% annual pace last quarter, compared with 2.9% estimated in November and a 2.6% pace for the second quarter. Economists surveyed by Bloomberg had expected 2.9% growth. Last quarter’s growth was the weakest since the fourth quarter of 2005, when the economy expanded at a 1.8% rate.

The government’s personal consumption expenditures price index, a measure of prices tied to consumer spending, rose 2.4%, the same as reported last month and down from 4% in the second quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.2% annual rate, also the same as reported last month, compared with a 2.7% increase in the second quarter.The GDP price index rose at a 1.9% annual rate, compared with 1.8% reported in November and 3.3% in the second quarter.

Fed policy makers last week suggested a softer outlook for economic growth while noting that inflation risks remain. Dallas Fed President Richard Fisher said on Tuesday inflation is a greater risk to the economy than slower growth and the Fed may need to raise interest rates if price increases don’t subside.

“The risk of unacceptably high inflation still outweighs the risk of substandard economic growth,” Fisher said in the text of a speech to the Rotary Club of Longview, Texas.

Fisher’s speech was the first by a Fed policy maker to address the US economy since the central bank voted on December 12 to hold the benchmark overnight lending rate between banks at 5.25% for a fourth straight meeting. Business inventories rose at a $55.4 billion annual rate, compared with $58 billion reported last month and a $53.7 billion rate of increase in the prior quarter. Stockpiles added 0.06 percentage point to growth in the third quarter. The government had first reported, in October, that inventories subtracted from growth.

A narrower trade gap than previously estimated subtracted less from growth during the quarter. The trade deficit cut 0.19 percentage point from GDP, compared with 0.21 percentage point estimated last month.

Growth in foreign economies and a weaker dollar may bolster demand from overseas, helping to manage the trade gap and to support some economic and factory growth in the US even as the housing slump persists, economists said. Residential construction fell at an 18.7% annual rate in the third quarter, compared with an 18% drop estimated in November and an 11.1% decline from April through June.

Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 10% annual rate last quarter, the same as previously estimated, following a 4.4% increase in the second quarter. Spending on equipment and software rose at a 7.7% annual rate, compared with the 7.2% previously reported for the quarter.