The economy sprinted ahead at its fastest pace in four years during the summer, although it is expected to limp through the final three months of this year as the housing and credit debacles weigh on individuals and businesses alike.

The Commerce Department reported Thursday that gross domestic product grew at a 4.9 percent pace in the July-to-September quarter, unchanged from an estimate made a month ago. The performance was especially impressive given that the housing market plunged deeper into despair. Builders slashed spending on housing projects in the third quarter at an annualized rate of 20.5 percent, the most in 16 years.

Economic growth in October through December is expected to have slowed to a pace of just 1.5 percent or less. Gross domestic product measures the value of all goods and services produced within the United States.

"The economy is slowing down so fast this quarter you can see the skid marks as it slams on the brakes," said Stuart Hoffman, chief economist at PNC Financial Services Group.

The big worry is that individuals will cut back on their spending and throw the economy into a recession. Former Federal Reserve Chairman Alan Greenspan and others say the odds of that happening have grown this year. Greenspan recently warned that the economy is "getting close to stall speed."

To rescue the economy, Fed Chairman Ben Bernanke and his colleagues have sliced a key interest rate three times this year; those moves dropped that key rate down to 4.25 percent, a two-year low. Still, Bernanke has been criticized for not moving more quickly and aggressively to deal with the problems.

The collapse of the once high-flying housing market, a mortgage meltdown and a painful credit crunch, have propelled home foreclosures to record numbers. The problems have forced banks and other financial companies to rack up multibillion-dollar losses, have unnerved Wall Street and have the Bush administration and the Democrat-controlled Congress accusing each other of not doing enough to stem the crisis and scrambling for solutions to curb the fallout.

Credit problems have made it harder for people to get financing to buy a home, aggravating the housing slump. The inventory of unsold homes continues to pile up, forcing builders to cut back even deeper on construction projects. Home foreclosures and late payments are expected to get worse. The troubles in housing are expected to drag on well into next year, acting as a weight on national economic activity.

In the third quarter, the housing slump lopped a sizable 1.08 percentage point off GDP. Analysts expect the ailing housing market to bite into economic activity in the coming quarters.

Whether the economy manages to avoid a recession or not will hinge largely on how consumers and the nation's employment situation hold up.
Another report showed that more people signed up for unemployment benefits last week, suggesting that the job market is softening.

The Labor Department reported that new applications filed for jobless benefits rose by 12,000 to 346,000. It was a larger increase than economists were expecting. They were forecasting claims to rise to 335,000 last week.

Consumer spending grew at a lukewarm pace of 2.8 percent in the third quarter, just a tad better than the 2.7 percent reported a month ago. Consumer spending, however, is expected to get a lot cooler in the final three months of this year, economists say.

So far, the nation's job market, while slowing down, hasn't fallen to pieces. New job creation and wage gains have helped to support consumer spending and offset some of the negative forces from the housing and credit problems.

The unemployment rate, now at 4.7 percent, is expected to climb to 5 percent by early next year as the economy loses speed. Should the job market abruptly lose momentum, consumers could be spooked and snap shut their wallets and pocketbooks, sending the economy into a tailspin.
"The last major pillar supporting economic growth, consumer spending, may soon start to buckle," warned Bernard Baumohl, managing director of the Economic Outlook Group.

Businesses, however, largely carried the economy in the third quarter. Sales of U.S. exports abroad powered growth. Exports grew by 19.1 percent, on an annualized basis, the most in four years, and even better than previously estimated. Those sales were aided by the falling value of the U.S. dollar, which makes U.S. goods cheaper to buy on foreign markets.

A separate GDP-related gauge of inflation showed that "core" prices, excluding food and energy, increased at a rate of 2 percent in the third quarter, up sharply from a 1.4 percent pace in the second quarter. The new third-quarter core inflation reading was higher than a 1.8 percent growth rate estimated a month ago. The 2 percent reading was at the upper bound of the Fed's comfort zone for inflation.

That pickup suggested that high energy prices are pushing up the prices of other goods and services. High energy prices are a double-edged sword. They can put a damper on growth and also stoke inflation, which would be a dangerous combination for the economy.
The situation could complicate the Fed's job of trying to keep the economy growing, while making sure that inflation is under control. The central bank's bracing tonic for weakening economic growth is lowering its key interest rate, while the remedy for inflation is raising its key rate.

One of the reasons Bernanke and his colleagues opted to slice the Fed's key rate by just one-quarter percentage point on Dec. 11 was because of concerns about a possible inflation flare up. The modest cut disappointed Wall Street, which wanted a bolder, half-point rate reduction. That investor disappointment caused stocks to tumble.

Source: Associated Press