U.S. economic growth sharply decelerated during the third quarter, falling to an annual rate of 1.6 percent after expanding at a 2.6 percent rate during the second quarter. Third-quarter growth proceeded at the slowest pace since the first quarter of 2003. During the first quarter of 2006, the economy grew at a blistering 5.6 percent annual rate, which largely reflected the rebound from the Katrina-induced slowdown during last year’s fourth quarter, when growth had fallen to 1.8 percent. During the last four quarters, the economy has expanded by 2.9 percent, the slowest four-quarter growth rate in more than three years. Since President Bush entered office, when he inherited a mild recession, the U.S. economy has expanded at an average annual rate slightly below 2.6 percent.
For the fourth consecutive quarter, residential construction declined, exerting downward pressure on the economy’s overall growth rate. After falling at an annual rate of 11.1 percent during the second quarter, residential construction plunged 17.4 percent last quarter. The housing market appears to have entered its long-awaited correction. Two weeks ago, the federal government reported that sales of new one-family houses in September were 14.2 percent below the September 2005 level, while the median sales price had dropped 10 percent ($23,300) from its year-earlier level. Meanwhile, the National Association of Realtors reported two weeks ago that existing-home sales in September were also down 14.2 percent from September 2005. Bloomberg reported that it was “the biggest year-over-year decline since record-keeping began in 1969.” The evolving housing correction may be increasing public concern on the health of the economy.
Meanwhile, investment rebounded smartly, rising at a 8.6 percent pace, nearly double the rate during the second quarter. Personal consumption advanced briskly at a 3.1 percent annual rate. There was also good news on the inflation front. The price index for core personal consumption expenditures (PCE) increased at a 2.3 percent annual rate during the third quarter. That was down from 2.7 percent during the AprilJune period. In a separate report on personal income and outlays released late last month, the monthly core PCE measured on a year-over-year basis, declined for the first time since January. The stock markets’ continued advance is another piece of good news on the economic front. Whether the economy has achieved the much-desired “soft landing” or is on the verge of a hard fall remains to be seen.