WASHINGTON (AFP) — The US economy grew by a robust 3.9 percent in the third quarter despite tight credit that is deepening a housing slump, as consumers regained their appetite for spending, the government said Wednesday.
The economy accelerated from 3.8 percent growth in the second quarter to post the strongest expansion since the first quarter of 2006, the Commerce Department said.
The glowing picture of the world's largest economy showed a modest increase in inflation ahead of a Federal Reserve interest rate decision later in the day.
The unexpectedly overall strong performance in the July-September period exceeded the Wall Street forecast of a 3.1 percent rise in gross domestic product (GDP), a measure of output of goods and services in the country.
"Solid economic growth was matched by moderate inflation making this about as good a report on the economy as you can get," said Joel Naroff, chief economist at Naroff Economic Advisors.
"This may have been the summer of the housing market's discontent but it clearly wasn't for the rest of the economy," Naroff said.
Most analysts expected the Fed to lower interest rates to cushion the economy from the steepening housing downturn and and a related credit crunch.
The Fed slashed its federal funds rate by a half point to 4.75 percent six weeks ago to ease financial market turmoil stemming from a crisis in the subprime mortgage sector, where loans are given to homebuyers with poor credit histories.
The Commerce Department's first estimate of third-quarter growth, based on incomplete data, said the slight acceleration from the second-quarter pace reflects stronger gains in consumer spending and exports.
Consumer spending, which accounts for roughly two-thirds of US output, rebounded to a 3.0 percent annualized pace, after a weak 1.4 percent gain in the second quarter.
Exports, underpinned by a weak dollar, grew by a whopping 16.2 percent, up from 7.5 percent in the second quarter.
GDP growth was partly offset by a 5.2 percent increase in imports, after a decrease of 2.7 percent in the second quarter, and a steepening decline in residential investment, from homebuying to housing construction.
Residential investment plunged by 20.1 percent, nearly double the 11.8 percent decline in the prior quarter, reflecting the troubles in the housing market following the collapse of a years-long boom in 2006.
Many analysts expect the Fed to announce Wednesday a quarter-point rate cut at the end of a two-day meeting around 1815 GMT.
Inflation news was encouraging. The Commerce Department said its "core" inflation gauge, excluding food and energy prices, rose 1.8 percent, compared with 1.4 percent in the second quarter. But the increase was within the 2.0 percent Fed target for acceptable pressure on the economy.
The expansion in the second and third quarters followed an anemic 0.6 percent pace in the first quarter, but analysts warned that clouds remain on the horizon for the current quarter and its important year-end holiday shopping season.
"With real house prices now falling at close to a 7.0 percent annual rate, wealth in existing homes is falling by 1.4 trillion dollars a year," said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank.
"It is difficult to believe that this rate of wealth destruction will not have an impact on consumption."
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