WASHINGTON U.S. economic growth slowed sharply in the third quarter to its weakest pace in more than a year, reinforcing expectations among investors that the Federal Reserve will keep interest rates on hold in coming months.
The commerce department said gross domestic product, the broadest gauge of goods and services output in the economy, grew at a rate of 2.7 percent in the July-September quarter less than half the second quarter's 5.6 percent rate.
The third-quarter GDP number was well below the 3.4 percent rate of growth forecast by Wall Street economists. It was the slowest quarterly advance since a 2.5 percent rate of growth in the second quarter of 1999.
The U.S. Federal Reserve boosted interest rates six times from mid-1999 to May this year, aiming to curb growth and to keep inflation in check, and the impact of costlier credit is still working its way through the economy.
Commerce said companies scaled back on additions to inventories and sharply trimmed the rate of spending increases on new production equipment, implying they expect slower economic growth to continue.
But despite the overall slowdown, consumers who fuel the lion's share of national economic activity speeded up their spending pace after a lull in the second quarter.
"It certainly leaves (the Federal Reserve) very comfortable with what they have done so far," said economist Carol Stone of Nomura Securities in New York.
Financial markets responded positively to the report of weaker-than-expected growth, with bond prices jumping higher on hopes it meant the U.S. Central Bank may be done raising borrowing costs.
But bond prices later settled back as stocks rose, overshadowing the weak GDP report as funds shifted back into equities after wild swings in stock markets recently.
The Dow Jones industrial average was ahead about 0.3 percent at mid-morning and the high tech-laden NASDAQ composite index was up about 1.7 percent.
Some analysts were cautious about whether the slower GDP performance will last, or whether growth will bounce back enough to keep the Fed wary.
Ian Shepherdson, an economist with High Frequency Economics in Valhalla, N.Y., commented: "The key message here is that private sector growth was robust.
The soft headline does not bring Fed easing closer." A separate report by the Commerce Department, showing strong growth in orders for costly manufactured goods in September, underscored the solidity of both consumer and business demand amid a slowing economy.
The report said the value of new orders for durable goods items like cars, airplanes and furniture increased 1.8 percent after a gain of 3.5 percent in August.
The weaker GDP number relieved concerns the economy, now in a record 10th year of growth, would prove so hard to curb that it might require a prolonged series of Fed rate rises.
"It shows, if even for only one quarter, the U.S. economy is mortal, but it's nothing too alarming," said economist Sean Callow of ideaglobal.com in New York.
Consumer spending grew at a rate of 4.5 percent, up from 3.1 percent in the second quarter, indicating that ample jobs and rising incomes likely were keeping confidence high enough to thwart a sharp economic downturn in coming months.
Price rises remained muted in the third quarter. The personal consumption expenditures measure, which Fed Chairman Alan Greenspan favors, advanced at a rate of 2.2 percent after 2.1 percent in the second quarter.
The Fed is aiming to bring the economy to a so-called "soft landing", in which the growth rate eases enough to keep inflation from flaring up without causing big job losses.
During the third quarter, businesses added to their inventories at a rate of $79.9 billion a year.
Though that was up slightly from a $78.6-billion rate of growth in the second quarter, it meant that inventory-building was leveling off and adding less impetus to the economy than was the case earlier in the year when inventory-building had sped up from a $36.6 billion-a-year rate in the first quarter.
Companies trimmed their investment plans in the third quarter as well. Spending on fixed investments, like new plants and equipment, grew at a 2.9 percent rate after an 11.2 percent surge in the second quarter.
The third-quarter GDP report is based on early economic data and will be revised twice in coming months.
Earlier this week, the president of the regional Federal Reserve Bank of Dallas, Robert McTeer, said he anticipated a slowing in third quarter GDP but predicted it would be revised upward later when more information becomes available.
"We all feel that growth is slowing down." McTeer said in a speech.
"I think that the economy is moderating a little bit. But if it lands, I think it will be a soft landing." (Reuter)