Sales of new homes drop to a 7-year low

To help protect the economy from the ill effects of the housing slump and credit crunch, the Federal Reserve last week slashed a key interest rate. The hope is that lower rates will induce more spending and investment and thus energize overall economic activity. Analysts believe another rate cut will come in late October.

Critical to the economy's outlook is the health of the jobs market.

In another report, fewer people signed up for unemployment benefits last week, raising hopes that the recent weakness in the jobs market won't be long lasting.

The second-quarter's bounce-back came even amid the continuing strain of a housing slump. Builders slashed spending on housing projects by 11.8 percent, on an annualized basis, in the spring. Other businesses, though, boosted investment and spending in the second quarter on such things as equipment and software and construction of new plants, office buildings and other things.

Company profits also gained ground in the spring. One measure showed that after-tax profits rose by 5.2 percent in the second quarter, up from a 1.5 percent gain in the first quarter.

But a credit crunch, which took a turn for the worse in the third quarter, could put pressure on companies and lessen their appetite to invest. Sales of big-ticket manufactured goods plunged in August.

The free flow of credit is important to the smooth functioning of the national economy. If credit becomes too difficult to get, it can put a damper on peoples' ability to buy big-ticket items such as homes, cars and appliances. And it can crimp businesses' capital investment and hiring.

The worst housing slump in 16 years is being painfully felt. Higher interest rates squeezed homeowners, especially "subprime" borrowers with blemished credit or low incomes. Foreclosures set records and late payments spiked. Lenders were forced out of business. Hedge funds and other investors in subprime-related mortgage securities got clobbered.

All that has caused stocks on Wall Street to careen wildly in the past few months.

President Bush, meanwhile, is continuing to get low marks for his economic stewardship. Just 37 percent approve of his handling of the economy in September, down from 41 percent in August, according to an AP-Ipsos poll.

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