The economy expanded faster than expected in the third quarter, led by a surge in consumer spending and exports, the government reported today. But housing expenditures plunged, and economists remained wary about the outlook for the next few months as the market awaits the Federal Reserve’s decision on interest rates at 2:15 p.m. today.
The 3.9 percent annual growth rate compared with 3.8 percent in the second quarter and 0.6 percent in the first quarter. The report from the Commerce Department is a preliminary estimate of gross domestic product in July through September, a volatile period that included the bleakest moments of the summer’s subprime mortgage collapse.
The growth rate, which beat most analysts’ expectations, adds a new wrinkle to the Fed’s deliberations at today’s meeting. The central bank is expected to cut its benchmark interest rate by a quarter-point in response to widespread concerns about the lagging housing market and a credit squeeze.
But today’s G.D.P. report presents a more cheerful view of the economy. The growth rate was the fastest since the first quarter of 2006. Consumer spending expanded at more than twice its rate in the second quarter, rising 3 percent after a 1.4 percent gain in the second quarter with a surge in sales of big-ticket products like appliances and furniture. Businesses spent more, too, with producer expenditures growing at a 7.9 percent annual rate, down slightly from 11 percent in the second quarter.
“There was more momentum than recognized going into the financial crises of the summer,” said Stuart G. Hoffman, the chief economist at PNC Financial. But Mr. Hoffman warned the G.D.P. numbers masked a slowdown since August. “It sure hit a headwind when we saw the problems on Wall Street,” he said.
Inflation may also be a greater risk than anticipated. Rate cuts stimulate the economy by making it easier for banks, consumers and businesses to borrow money, but Fed officials are always wary that a cut will ignite inflation. The Fed’s preferred inflation gauge ticked up 1.8 percent last quarter, an increase from 1.4 percent in the second quarter and the fastest growth rate since early 2006. The gauge, known as the personal consumption expenditures deflator, measures prices paid by consumers and excludes prices of food and energy, which are extremely volatile.
Still, a measure of activity in the housing sector known as residential spending dropped 20.1 percent in the third quarter, accelerating from an 11.8 percent dip in the previous period. Investors and analysts remain wary that problems in the beleaguered housing market will bleed into the broader economy, stifling fourth-quarter growth.
That view was bolstered by a weak manufacturing report this morning. Business activity in the Chicago area, considered a bellwether by economists, dropped in October as costs increased and businesses received fewer orders, according to the Chicago arm of the National Association of Purchasing Management. The index fell to 49.7 this month from 54.2 in September. Readings below 50 indicate contraction.
Some analysts say that surging oil prices, a weakening dollar, and a mixed outlook for domestic businesses all provide ample reason for the Fed to act.
On the other side of the coin, construction activity unexpectedly rose in September, buoyed by an increase in government projects. Spending on construction rose 0.3 percent last month compared with a 0.2 percent decline in August, the Commerce Department said today. Housing projects, however, continue to drop, with residential spending down 1.4 percent in September after a 1.7 percent dip in August.
About 106,000 jobs were created in October, a promising sign for the job market, according to a private report also released this morning. The survey also revised upward September’s job growth to 61,000 new jobs, according to ADP Employer Services. The leading measure of employment, the Labor Department’s private payroll report, will be released on Friday.
