Economic Growth Beats Forecasts

US economic growth beats forecasts

By Eoin Callan and Krishna Guha in Washington
Published: November 29 2006 14:19 | Last updated: November 29 2006 19:05

The US economy grew at a rate of 2.2 per cent in the third quarter, faster than previously thought, while wage growth earlier this year was revised down on Wednesday, adding to evidence that the economy is on track for a soft landing.
This picture was reinforced by the latest Fed Beige Book surveyof economic conditions, which offered little sign of a deterioration in the US economy during October and early November.
Most regional Fed districts “reported continued moderate growth.” In spite of “continuing softness in automobile and housing-related sales”, most districts said customer spending increased over the period.
Demand for services was seen as “healthy, according to most reports” while even manufacturing activity – which data suggests has seen some weakness – was “generally positive in most districts.”
The Beige Book highlighted continued pressure in the jobs market, with a number of districts continuing to report “that labour markets were tight, especially for high-skilled occupations.” Wage growth, though, was characterised as still “generally moderate.”
The improved estimate for third-quarter growth is significantly higher than the government’s initial estimate of 1.6 per cent annualised and well above Wall Street’s expectations of 1.8 per cent, though still lower than the 2.6 per cent growth in the second quarter.
The growth rate underlines the Federal Reserve’s optimistic view that the US economy is expanding at a moderate rate, in spite of the drag from a severe correction in housing.
The stronger growth estimate makes it more likely that the Fed will continue to keep interest rates on hold as it continues to monitor inflation, which remains “uncomfortably high” in the view of Ben Bernanke, chairman.
Price pressures were fractionally more muted than previously thought in the third quarter, with the Fed’s favoured measure – the core personal consumption expenditure deflator – easing to an annualised rate of 2.2 per cent from an earlier estimate of 2.3 per cent.
Wage and salary growth in the second quarter was much slower than previously thought, information that will partly ease Fed concerns about inflation pressures arising from the tight labour market.
The government statistics showed considerable strength in the business sector as commercial investment rose at a 10 per cent annual rate – higher than the previous estimate of 8.6 per cent – while corporate profits grew much faster than earlier estimates suggested with a rise in pre-tax earnings of 4.6 per cent to $46.3bn.
The housing sector remained one of the weakest, with investment in homes falling by 18 per cent during the quarter, the biggest decline in 15 years - in line with earlier estimates.
Separate data released on Wednesday showed that sales of new homes fell 3.2 per cent in October, while supplies of unsold houses remained stubbornly high, though new house prices ticked up. The biggest drop was in the North-East, where purchases fell 39 per cent from the previous month, according to the National Association of Realtors.
Haseeb Ahmed, an economist at JP Morgan Chase, was sanguine about the housing data, saying: “We would regard the trend over the past few months as essentially flat, consistent with what we have been seeing in mortgage applications for home purchase.”

Copyright The Financial Times Limited 2006