Economy's Growth Outpaces Predictions

Pedestrians carry their shopping bags as they walk in a New York file photo from Nov. 24, 2006. (Bebeto Matthews - AP)

The U.S. economy grew considerably faster than initially thought in the three months that ended in September, the government said yesterday in a report that underscores Federal Reserve fears about the risk of inflation.

The nation's gross domestic product, which is the value of all goods and services produced, rose at a 2.2 percent annual rate during the July-through-September quarter, the Commerce Department said. That was a modest growth rate, but it was significantly better than the department's initial estimate of 1.6 percent, which would have been the weakest pace in more than three years.

The new figures still show the economy has slowed this year, after expanding at a torrid 5.6 percent annual rate in the first three months and at a moderate 2.6 percent pace in the second quarter.

But the revised figures show an economy that continues to expand, not sputter toward a recession as many analysts had feared after seeing estimates of third-quarter growth. Consumers increased their spending at a faster rate in the third quarter than in the previous quarter, while business investment and exports also rose more briskly.

Those gains were enough to more than offset a steep plunge in home building. Spending on residential construction fell at an 18 percent annual rate, the fastest drop in 15 years and a slightly steeper decline than the Commerce Department's 17.4 percent estimate.

"The only reason the economy has slowed down is because of the housing markets," said Eugenio J. Alem?n, a senior economist with Wells Fargo Economics. "But that's it. There is no other sign the economy is weak."

Rather, Alem?n said, the Commerce Department report shows "the economy is doing better than the markets and some analysts are saying. The slowdown is there, but the sky is not falling."

That fits with Federal Reserve Chairman Ben S. Bernanke's remarks Tuesday indicating the central bank is more confident the economy is headed for a gentle slowdown that should cause inflation to fall without triggering too severe of a downturn.

Bernanke said Tuesday that he expected inflation to decline over the next year as the economy grows at a moderate pace. Analysts peg that at an annual rate of about 2.5 percent, or slightly less than the fastest speed at which experts believe the economy can expand over time without spurring inflation. Bernanke made it clear, however, that he continues to see inflation, not recession, as the biggest risk facing the economy.

A separate Fed survey of regional conditions released yesterday concluded that the economy has kept to that pace in recent weeks. The report said most of the 12 Federal Reserve regional banks reported "moderate growth" in their districts since the preceding survey, in mid-October, despite continued weakness in housing-related industries.

Economic growth even picked up speed in the districts overseen by the Federal Reserve Bank of New York and the Fed Bank of Richmond, which serves the Washington area. The Richmond bank was also among several regional Fed banks that reported tight labor markets, particularly for workers with skills in finance, health care, engineering, legal services, oil field work and trucking.

The housing figures since September have been mixed. New-home sales fell 3.2 percent in October, the Commerce Department reported yesterday. But sales of previously owned homes, which account for most of the market, rose 0.5 percent last month, the National Association of Realtors said yesterday. Inventories of unsold homes keep climbing, while prices have fallen in many markets.

Meanwhile, consumers kept spending this month and last, benefiting from lower fuel prices, falling mortgage rates, low unemployment and rising incomes, according to the Fed regional survey and other recent retailers' reports.

The Commerce Department also gave the Fed some good news by slightly lowering its estimate of inflation in the third quarter. Consumer prices rose at a 2.4 percent annual rate, just below the 2.5 percent previously reported. After excluding volatile food and energy prices, core consumer prices rose 2.2 percent in the third quarter, compared with the estimated 2.3 percent.