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Housing slump puts drag on economy in 3d quarter

WASHINGTON -- The economy felt the strain of the housing bust and lost momentum in late summer, with more sluggish performances expected in the months ahead.

Economic growth slowed to a 2 percent pace in the July-to-September quarter, the Commerce Department reported yester day. That was slightly worse than the 2.2 percent annual rate the government estimated a month ago, yet better than the 1.6 percent rate initially calculated for those months.

Still, the message was clear: The deepening housing slump is crimping growth.

"The housing market is profoundly weak," said Ken Mayland, president of ClearView Economics. "The economic slowdown really took hold in the third quarter, and, I think, it is going to basically continue through the first half of next year."

Investment in home building declined at a 18.7 percent rate -- even more than previously estimated -- and was the largest cut in 15 years. That shaved 1.2 percentage points off third-quarter growth, the most in nearly 25 years.

Even with expectations that economic activity will continue to be subpar, Federal Reserve chairman Ben Bernanke and most analysts do not expect the troubled housing market will undermine the economy to the point it slides into a recession.

Economists say gross domestic product in the October-to-December quarter could come in at 1.7 percent to 2.5 percent higher, or slightly more. Growth estimates for the first quarter of 2007 are in the same range.

GDP measures the value of all goods and services produced in the United States. It is the best barometer of the country's economic health.

The housing slump will bite into overall growth, but not too badly, some economists hope. Housing will continue to "contract during 2007 but at nowhere near the hemorrhage of the third quarter," said T.J. Marta, fixed-income strategist for RBC Capital Markets.

In the third quarter, consumers boosted their spending 2.8 percent. Business spending rose at an annual rate of 7.7 percent.

An inflation gauge tied to the GDP report showed that core prices (excluding food and energy) rose at a rate of 2.2 percent in the third quarter, down from 2.7 percent in the second.

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