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US economy expands 4.9% in third quarter

But fourth-quarter growth may drop as full impact of credit crisis is felt

WASHINGTON – ECONOMIC growth in the United States surged in the third quarter, before the full impact of the worsening housing recession and turmoil in credit markets took hold.

The world’s largest economy grew at an annual rate of 4.9 per cent, the most in four years, according to revised data yesterday from the Commerce Department in Washington.

The pace was a percentage point stronger than estimated last month and followed a 3.8 per cent rate in the second quarter.

Consumers and businesses are spending less, as home prices fall, energy costs rise and banks make getting loans more difficult and costly.

Federal Reserve vice-chairman Donald Kohn signalled that he was open to lowering interest rates again following the deterioration in credit markets.

The odds of a recession ‘are much too close for comfort’, said Mr Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto, who correctly forecast the gross domestic product (GDP) revision. ‘We are likely to see growth of less than 1 per cent in the fourth quarter.’

The Dow Jones Industrial Average struggled early on but turned upwards slightly to be down 15.28 points at 13,274.17 after about one and a half hours of trading.

Another government report showed the number of Americans filing first-time claims for unemployment benefits rose more than forecast to their highest in nine months, pointing to a further slowing in the labour market.

Third-quarter GDP growth matched the median estimate of 75 economists surveyed by Bloomberg News.

Estimates ranged from 3.9 per cent to 5.5 per cent.

‘Stronger growth in the third quarter implies weaker growth in the fourth quarter due to a partial payback in both trade and inventories,’ said Mr Drew Matus, a senior economist at Lehman Brothers Holdings in New York.

Fewer new homes than forecast were sold in the US last month, even as prices dropped by the most in almost four decades, deepening the real estate slump that threatens to stall economic growth.

A total of 728,000 new houses were purchased at an annual rate, compared with a median forecast of 750,000 by economists surveyed by Bloomberg News.

The figure was up from a revised 716,000 pace in September that was the lowest in almost 12 years, the Commerce Department reported yesterday.

A worsening housing slump will be the biggest constraint on the economy well into next year, economists said.

Declines in home construction have reduced growth since the start of last year and lobbed off 1 percentage point in the third quarter.

Economic growth slowed in seven of the 12 Fed regions, with retailers ‘slightly pessimistic’ about year-end holiday sales, the central bank said in its regional business survey known as the Beige Book.

‘The national economy continued to expand during the survey period of October through mid-November but at a reduced pace,’ it said.

 

Source: BLOOMBERG NEWS (The Straits Times 30 Nov 07)

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