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A slumping housing sector helped slow US economic growth in the third quarter to its weakest pace in more than three years, the Commerce Department reported on Friday, leading financial markets to raise bets on interest-rate cuts next year.
Gross domestic product, which measures total economic activity within US borders, expanded at a 1.6 percent annual rate during the third quarter, down from 2.6 percent in the second quarter for the slowest advance since the first quarter of 2003.
The Bush administration insisted the soft GDP data, coming less than two weeks before the November 7 elections, did not signal the economy was spiralling downward but only that it was moving to a slower and steadier growth rate.
"I'm feeling good about making this economic ... transition from an unsustainable rate to a more sustainable rate," Treasury Secretary Henry Paulson said during a relatively rare meeting with print reporters in Treasury's pressroom.
Democrats expressed concern the economy was slowing at a time when workers were already struggling to keep up with inflation, a theme they have pressed on the campaign trail.
"Once again, the Bush economy is going in the wrong direction," said New York Rep. Carolyn Maloney. Consumers showed no sign that weakening housing prices were dampening their spirits, and were still boosting their spending. A separate survey at midmorning from the University of Michigan indicated that consumers were even more optimistic as the fourth quarter opened than previously thought.
A final October reading of the University of Michigan's consumer sentiment index came in at 93.6, up from a preliminary 92.3 and September's final reading of 85.4, said sources who saw the subscription-only report.
Stock prices sagged in morning trading on concern the GDP report implied weaker corporate earnings. But bonds rallied across the full range of maturities as investors bet it meant the Federal Reserve was less likely to raise interest rates and might tip toward reducing them in early 2007.
Growth was well below Wall Street forecasts for a 2.2 percent increase and reflected a range of influences that combined to slow the economy. The third-quarter report showed a striking 17.4 percent annual rate of contraction in spending on new housing - the biggest decline in 15-1/2 years.
In addition, growth in business spending on inventories slowed to only a $50.7 billion rate, subtracting 0.1 percentage point from GDP growth, and the value of imported goods accelerated sharply to a 7.8 percent annual rate of increase in the third quarter, more than three times the second quarter's 1.4 percent increase.
Analysts noted the data, though it was the first look at third-quarter GDP performance, was old and that growth appears set to pick up modestly in the current fourth quarter.
"Housing took a toll on the economy but bear in mind this was last quarter, and the current quarter is on a growth pace that would double this number" because of consumer spending, said economist Richard Yamarone of Argus Research Corp in New York.
The drag on growth from a rapidly softening housing sector was expected, since other reports have shown prices are weakening for both new and existing homes and builders are offering incentives to try to reduce their inventories of unsold homes.
By contrast, the GDP report showed business investment remained healthy and consumers picked up their spending pace, giving credence to forecasts that the economy retains enough vigour to keep growing at least at a moderate rate.
Non-residential investment, which measures business spending, rose at an 8.6 percent annual rate in the third quarter, close to double the second quarter's 4.4 percent. Consumer spending, which accounts for roughly two-thirds of national economic activity, increased at a 3.1 percent rate, up from 2.6 percent in the second quarter.
So-called core prices excluding food and energy items - an inflation measure the Federal Reserve watches - climbed 2.4 percent on a year-over-year basis in the third quarter. But there were signs that price rises might be easing. In the third quarter, core prices advanced at a 2.3 percent rate after rising 2.7 percent in the second quarter.

Copyright Reuters, 2006

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