Economy grew briskly in third quarter

updated 4:33 p.m. ET Oct. 31, 2007

WASHINGTON - 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.

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