US economy's summer sprint unlikely to last

Updated: 2007-12-20 23:56

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.

Businesses, however, largely carried the economy in the third quarter. Sales of US 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 US dollar, which makes US 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.

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