Video: Bush official on economy

updated 10/31/2007 4:33:43 PM ET 2007-10-31T20:33:43

The U.S. economy picked up speed in the summer, growing at a brisk 3.9 percent pace, the fastest in 1 1/2 years and an impressive performance even as a credit crunch plunged the housing market deeper into turmoil.

The latest snapshot of the country's economic health, released by the Commerce Department on Wednesday, suggested the economy is demonstrating much resilience and thus far holding up well to the strains in the housing and credit markets, which intensified during the third quarter and rocked Wall Street.

A second report from the department showed construction spending rose 0.3 percent in September, the best showing in four months. All-time high spending in both commercial construction by private builders and government projects more than offset weakness in home building.

For the entire July-to-September quarter, individuals ratcheted up their spending. U.S. businesses sold more goods abroad and boosted some investment at home. Those were main factors helping to push up overall economic activity during that period.

The third quarter's growth rate was up slightly from a 3.8 percent pace logged in the second quarter. It marked the strongest showing since the first quarter of last year.

The increase in gross domestic product exceeded analysts' forecasts for a 3.1 percent growth rate for third quarter. Gross domestic product is the value of all goods and services produced within the United States and is considered the best barometer of the country's economic fitness.

The White House was pleased that problems in housing did not spread widely through other parts of the economy during the summer as some feared. "This is an extremely resilient economy," said Ed Lazear, chairman of President George W. Bush's Council of Economic Advisers. "It is really quite remarkable."

Builders slashed investment in housing projects by 20.1 percent, on an annualized basis, in the third quarter, the largest drop in a year. That provided stark evidence of the darkening housing picture.

"This may have been the summer of the housing market's discontent but it clearly wasn't for the rest of the economy," said Joel Naroff of Naroff Economic Advisers.

The Federal Reserve called the third-quarter performance "solid" but agreed to lower a key interest rate to protect the economy down the road from the ill effects of the ailing housing market. The Fed — in its second rate reduction in six weeks — cut its key rate by one-quarter percentage point. That followed up on a bolder half-percentage point reduction ordered in September, the first rate cut in more than four years.

Wall Street rallied. The Dow Jones industrials jumped more than 130 points.

Major Market Indices

The ill effects of the housing slump and credit crunch didn't deter consumers in the summer.

Consumers, whose spending is an important ingredient for the economy's good health, actually rediscovered their appetite to spend in the third quarter. Their spending rose at a 3 percent pace, a considerable improvement from the second quarter's rather weak 1.4 percent growth rate.

One of the reasons why people are continuing to spend is because the nation's employment climate has managed to stay fairly sturdy through all the problems. Wage and job gains have served as shock absorbers for some of the negative forces of the housing slump, weaker home prices and more restrictive credit.

Another report from the Labor Department showed employers' costs to hire and retain workers rose 0.8 percent in the July-to-September quarter. That was down a bit from a 0.9 percent increase posted in the second quarter, but still suggested workers are seeing solid compensation gains.

Businesses, meanwhile, increased their spending on equipment and software at a 5.9 percent pace in the third quarter, the strongest in 1 1/2 years. They also boosted their investment in inventories, another factor that added to GDP.

Strong sales of U.S. exports to foreign buyers was another big factor in the good third-quarter showing. Exports grew by 16.2 percent, on an annualized basis, during the quarter. That was the biggest increase since the final quarter of 2003.

Business investment in commercial structures, such as office buildings and factories, grew at a 12.3 percent pace in the third quarter. It was a robust showing but down from a sizzling 26.2 percent growth rate in the second quarter.

Government spending also contributed to third quarter GDP growth. Such spending rose at a rate of 3.7 percent, following a 4.1 percent pace in the second quarter.

As the economy picked up a bit of speed, so did inflation, although the rise was not seen as worrisome.

An inflation gauge closely watched by the Federal Reserve showed "core" prices — excluding food and energy _ rose at a rate of 1.8 percent in the third quarter. That was up from a 1.4 percent pace in the second quarter, but it was within the Fed's "comfort zone."

Still, skyrocketing oil prices, which have reached record highs in recent days, could push up inflation and put a chill on consumer spending.

The meltdown in the mortgage market has made it harder for people to obtain financing to buy homes. That's aggravating problems in the housing market and leading to a mounting pileup of unsold homes. The housing slump is expected to drag on well into next year.

Against that backdrop, the Fed's overriding worry is that problems in housing and harder-to-get credit could seriously crimp spending and investing, dealing a dangerous blow to the national economy. Growth in the current October-to-December quarter is expected to slow to a pace of around 2 percent or less, according to some projections.

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