Economy grows by 2.2 percent in third quarter

updated 12:02 a.m. ET Dec. 2, 2006

WASHINGTON - The once-bustling economy has turned somewhat lethargic but should show enough energy to extend the long-running expansion and avoid slipping into a recession.

That is the feeling, for now, among economists as they digested the latest batch of economic news.

The economy lost steam in the late summer but not nearly as much as first thought, a hopeful sign the country is weathering the housing slump.

The Commerce Department reported Wednesday that economic growth clocked in at a 2.2 percent annual rate in the July-to-September quarter.

The new reading was a considerable upgrade from the government’s earlier estimate of a 1.6 percent growth rate, which would have been the worst showing in more than three years if it had held up.

The main factors for the higher estimate were stronger inventories amassed by companies and a trade deficit that didn’t strain economic growth as much.

The improvement, however, could not hide the fact that the economy has been losing momentum all year.

Over the first three months of the year, the economy grew at a blistering pace — 5.6 percent, the best performance in 2 1/2 years. From April through June, the growth rate was 2.6 percent as consumers and companies tightened spending in response to surging energy prices.

The further slowdown in late summer mostly reflected the deepening housing slump. Investment in home building was reduced by the largest amount in 15 years.

“It was a tough quarter, but not as tough as previously estimated,” said Mark Zandi, chief economist at Moody’s Economy.com. “But there’s reason to be optimistic that the expansion will remain intact. With businesses so flush with profits, they will continue to invest and hire and the economy will continue to move forward,” he predicted.

Wall Street was cheered by the news on the economy. The Dow Jones industrials jumped 90.28 points to close at 12,226.73.

On another encouraging note, a Federal Reserve survey released Wednesday found that most parts of the country had moderate economic growth in the late fall despite troubles in the housing market and the automotive industry.

Fresh evidence of the ailing housing market came from a separate Commerce Department report that showed new-home sales fell in October by 3.2 percent, the most in three months, although home prices did rise.

“So far the housing correction has been orderly and it does not appear to have done significant damage to consumers or to the economy but the situation bears continued watching,” said Carl Tannenbaum, chief economist at LaSalle Bank.

The Bush administration insists the economy is fundamentally sound. But Democrats say that the poor and the middle class have benefited little from the economic expansion over the past five years.

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