Washington, DC, October 27, 2006--Economic growth slowed sharply in the third quarter, increasing at a real seasonally adjusted annual rate of 1.6% after a 2.6% increase in the second quarter, the Commerce Department said Friday.
The growth rate was below the 2.0% growth rate expected by economists.
Residential investment had the largest negative impact on third-quarter growth.
Investments in housing fell 17.4% in the third quarter, the largest decline since the first quarter of 1991. Housing subtracted 1.1 percentage points from third-quarter growth.
The consumer sector held up well, with consumer spending accelerating compared with the previous quarter.
In nominal terms, GDP increased 3.4% to $13.3 trillion annualized. Inflation at the consumer level eased in the July-through-September period. The personal consumption expenditure price index increased at a 2.5% annual rate, down from 4.0% in the second quarter. The core PCE price index - which removes food and energy costs - increased at a 2.3% rate, down from 2.7% in the second quarter.
But the core PCE price index has increased 2.4% in the past year, up from 2.2% year-over-year growth in the second quarter. This is the fastest pace since the second quarter of 1995.
The annual inflation rate is above the Federal Reserve's 1.5% to 2% comfort zone.
Fed officials have stressed their discomfort with the high inflation rate, but have said they expect inflation to gradually ease as the economy continues to grow at a moderate pace in coming quarters.
Economists said the Fed is watching closely to see whether the slowdown gathers momentum or if the third quarter was the pause that refreshes growth.
In the third quarter, consumer spending increased at a 3.1% rate, up from a 2.6% rate in the second quarter. Consumer spending contributed 2.13 percentage points to growth.
Business investment increased at an 8.6%, compared with a 4.4% increase in the second quarter. Investments in equipment and software increased at a 6.4% rate, after falling 1.4% in the previous quarter.
The worsening trade balance subtracted 0.6 percentage points from growth. Exports increased 6.5% while imports rose 7.8%.
Inventories were not as bad as feared.
Inventory accumulation continued at a healthy $50.7 billion in the third quarter, down only slightly from $53.7 billion in the second quarter. As a result, inventories only subtracted 0.1 percentage points from growth.
Outstripping inventories and trade, the economy expanded at a 2.1% rate in the third quarter, up slightly from a 2.0% rate in the second quarter.
Government spending increased 2.0%. Federal spending increased 1.7%, including a 6.9% rise in nondefense spending. State and local government spending increased at a 2.1% rate.
There was little evidence of the weak auto sector in the GDP report. Motor vehicle output added 0.7 percentage points to growth and consumer spending on cars added 0.4 percentage points.
The first estimate of GDP is based on estimates of several key components, rather than on hard data. The October data on trade, inventories and construction spending are not yet available. The government will issue its second estimate on Nov. 29.
