U.S. Economy Grew More Than Forecast in Third Quarter

Economic growth in the U.S. unexpectedly accelerated in the third quarter as increases in exports, consumer spending and business investment made up for another plunge in home construction.

Gross domestic product grew at an annual rate of 3.9 percent in the quarter, the most since the first three months of 2006, compared with a 3.8 percent pace in the prior quarter, the Commerce Department said today in Washington. The Federal Reserve's preferred price gauge rose more than forecast.

The report comes as Federal Reserve policy makers meet to set interest rates, with most economists predicting officials will lower their benchmark rate for a second month. The figures may give the central bank reason to signal it isn't inclined to make further reductions, analysts said.

Looking forward, the Fed is probably still going to argue that the economy is softening, said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. The language in today's statement could become a little more indicative of a Fed that will be reluctant to move again.

The median forecast of 82 economists surveyed by Bloomberg News projected the growth rate at 3.1 percent. Estimates ranged from 2.0 percent to 4.0 percent.

The dollar strengthened against the euro and yen in the minutes after the GDP report was released, before later paring its gain. Treasury notes declined. A report from the National Association of Purchasing Management-Chicago today showed business activity unexpectedly shrank this month.

Advance Report

Companies in the U.S. added 106,000 jobs in October, more than economists had forecast, according to a report today from ADP Employer Services. A report from the Labor Department also showed employment costs rose in the third quarter at a slower pace than in the previous three months, suggesting increases in wages and benefits aren't heating up inflation.

The GDP report is the first for the quarter and will be revised in November and December as more information becomes available.

The Fed's preferred inflation gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 1.8 percent annual pace following a 1.4 percent increase the prior quarter, according to the report.

The gain leaves prices within the 1 percent to 2 percent range policy makers, including Ben S. Bernanke before becoming Fed chairman, have said is their preferred zone.

Certain Rate Cut

Federal funds futures indicate a near certainty that the Fed will cut its benchmark rate by 25 basis points today to 4.5 percent, following its half percentage point cut on Sept. 18. The Fed will announce its decisions today at around 2:15 p.m.

Consumer spending grew at a 3 percent pace following a 1.4 percent increase in the prior quarter, contributing the most to the gain in growth. Still, many economists project spending will slow as declining property values turn Americans pessimistic.

The dreaded collateral damage from the housing market hasn't showed up yet in consumer spending, though it's just a matter of time, said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. The economy will probably expand at a 1.8 percent pace in the current quarter, according to the median forecast of economists surveyed earlier this month.

Consumers weren't the only ones buying last quarter. Gains in both commercial construction projects and purchases of equipment and software contributed to a 7.9 percent increase in business investment. The 5.9 percent rise in spending on new equipment was the biggest since the first quarter of 2006.

An increase in inventories contributed another 0.4 percentage point to growth.

Rise in Exports

The economy was also buttressed by a narrowing of the trade deficit that added 0.9 percentage point to the rate of expansion. The gap shrank to $546.2 billion at an annual pace, the smallest since the last three months of 2003.

General Electric Co.'s third-quarter profit rose as large- equipment orders climbed 39 percent amid a surge in demand from countries that are building airports and power grids, the Fairfield, Connecticut-based company said Oct. 12.

We see orders everywhere around the world, GE's Chief Executive Officer Jeffrey Immelt said on a conference call earlier this month. That seems to be accelerating, not diminishing.

Home construction remained the biggest drag on GDP, the report showed. A 20.1 percent plunge in homebuilding, the seventh consecutive decline, subtracted a percentage point from growth.

Credit restrictions since the August collapse in subprime lending intensified the blow to housing at the end of the quarter. Existing home sales in September fell 8 percent from the prior month, while housing starts declined 10 percent to the lowest since March 1993, reports earlier this month showed.

Source - Bloomberg