Economic growth totters to slowest rate in over 3 years

By JEANNINE AVERSA

The Associated Press

WASHINGTON -- The economy has slowed to a snail's pace, growing in the just-finished quarter at the slowest rate in more than three years and stirring fresh debate about the country's financial health heading into the elections.

The Commerce Department reported Friday that economic growth during the July-to-September period clocked in at an annual rate of just 1.6 percent -- a subpar performance that mostly reflected the deepening housing slump. Investment in homebuilding was cut by the largest amount in 15 years.

That "packed a wicked punch for the U.S. economy ... but it was not a knockout blow," said Stuart Hoffman, chief economist at PNC Financial Services Group.

The fresh reading on the economy, which fell short of the 2.1 percent pace analysts were forecasting, disappointed economists, rattled investors and gave Republicans and Democrats plenty to argue about.

Who to trust

Economic matters are expected to influence voters' choices when they go to the polls Nov. 7.

President Bush's approval rating on the economy is at 40 percent, among all adults surveyed in an AP-Ipsos poll. That remains near his lowest ratings. Those surveyed trusted Democrats more than Republicans to handle the economy.

The Bush administration quickly sought to downplay the slowdown in economic activity.

"Everybody expected this. You have a combination of rising energy prices and also rising interest rates, and now you've seen a reverse on both," said White House press secretary Tony Snow.

Commerce Secretary Carlos Gutierrez said that latest GDP figures displayed the economy's resilience even as the housing market has slumped. "I would not panic about this," he said in an interview.

Democrats countered that the slowdown in economic growth is evidence that the administration and the Republican-controlled Congress are doing a poor job handling the economy.

"Just because the president looks through his rose-colored glasses and sees a strong economy doesn't make it so," said House Democratic Leader Nancy Pelosi of California. "He refuses to see the millions of Americans who are working hard and are unable to get ahead."

Sen. Jack Reed, D-R.I., said the cooling in economic growth "undercuts the President's claim that his tax cuts are working."

Weak growth

On Wall Street, stocks sagged. The Dow Jones industrials, which had hit new highs in recent sessions, lost 73.40 points to close at 12,090.26.

The third quarter's performance was the weakest since a 1.2 percent growth rate eked out in the first quarter of 2003, when a nervous nation hunkered down for the start of the Iraq war.

The latest reading underscores just how much speed the economy has lost this year.

In the first three months of this year, the economy grew at a brisk 5.6 percent pace, the strongest growth spurt in 2 1/2 years. But growth slowed to a 2.6 percent pace in the second quarter as consumers and businesses tightened their belts in response to the toll of rising energy prices and the impact of two-plus years of climbing interest rates.

In the third quarter, though, consumers and businesses did their part to keep the economy going.

Consumers boosted spending at a rate of 3.1 percent, up from a 2.6 percent pace in the second quarter.

Businesses increased spending on equipment and software at a 6.4 percent pace in the third quarter, a turnaround from the 1.4 percent rate of decline in the second quarter.

Investment in new plants, office buildings and other commercial construction rose at a brisk rate of 14 percent, following a 20.3 percent growth rate in the second quarter.

That helped cushion the big hit to the economy from the housing cooldown.

Spending on home building dropped at a rate of 17.4 percent in the third quarter, the most since the first quarter of 1991. The housing slump shaved 1.12 percentage points from the third quarter's overall economic growth, the most in almost 25 years.

Treasury Secretary Henry Paulson, in an interview, said the housing boom over the last five years was "clearly unsustainable" and that the housing market "needed to have a correction" by slowing to a more sustainable pace.

The bloated trade deficit and sluggish inventory building by businesses also weighed down economic activity in the third quarter.

Even with the feeble third-quarter showing, analysts don't believe the economy is in danger of sliding into recession. "This should prove to be a midcourse breather in a longer expansion, not the end to the expansion," said Ken Mayland of ClearView Economics.

Many predict the economy will pick up a bit in the October-to-December period, with some estimates for a growth rate of 2.5 percent and higher. Falling energy prices should help bolster consumer and business spending and thus overall economic activity.

An inflation gauge tied to Friday's report showed that core prices -- excluding food and energy -- moderated. These prices advanced at a rate of 2.3 percent in the third quarter, which was down from 2.7 percent in the prior quarter.

With economic growth slowing and energy prices retreating, the Federal Reserve has leeway to keep holding interest rates steady, analysts said. The Fed on Wednesday left rates unchanged for the third meeting in a row.

The Fed had hoisted rates 17 times since June 2004 to fend off inflation. The Fed's goal is to slow the economy sufficiently to thwart inflation but not so much that it tips into recession.

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On the Net:

Gross Domestic Product: http://www.commerce.gov/