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Economy slows, but remains solid

The economy lost steam in the late summer but not nearly as much as first thought, a hopeful sign the country is weathering the housing slump.

The Commerce Department reported Wednesday that economic growth clocked in at a 2.2 percent annual rate in the July-to-September quarter.

The new reading was a considerable upgrade from the government's earlier estimate of a 1.6 percent growth rate, which would have been the worst showing in more than three years if it had held up.

The main factors for the higher estimate were stronger inventories amassed by companies and a trade deficit that didn't strain economic growth as much.

The improvement, however, could not hide the fact that the economy has been losing momentum all year.

Over the first three months of the year, the economy grew at a blistering pace - 5.6 percent.

From April through June, the growth rate was 2.6 percent as consumers and companies tightened spending in response to surging energy prices.

The further slowdown in late summer mostly reflected the deepening housing slump. Investment in home building was reduced by the largest amount in 15 years.

"It was a tough quarter, but not as tough as previously estimated," said Mark Zandi, chief economist at Moody's

Fresh evidence of the ailing housing market came from a Commerce Department report that showed new-home sales fell in October by 3.2 percent, the most in three months, although home prices did rise.

"So far the housing correction has been orderly and it does not appear to have done significant damage to consumers or to the economy but the situation bears continued watching," said Carl Tannenbaum, chief economist at LaSalle Bank.

The Bush administration says it is confident that the economy is fundamentally sound.

Consumers and businesses did their part keeping the economy moving in the third quarter.

Consumers spending rose at a 2.9 percent pace, the most since the first months of this year.

Businesses stepped up investment in equipment and software at 7.2 percent pace - also the best showing since the first quarter.

Also, their investment increased in new plants, office buildings and other commercial construction.

Companies' profits gained ground in the third quarter. One measure showed after-tax profits rising by 4.6 percent, compared with 0.3 percent in the second quarter.

All that helped to cushion against the housing slump. Builders cut spending on home building at a 18 percent annual rate, even deeper than the government estimated a month ago and the most since early 1991.

That sliced 1.16 percentage points off the gross domestic product in the third quarter, the most in nearly 25 years.

The revised GDP figure for the third quarter was better than the 1.8 percent pace that economists had forecast.

Nevertheless, it was the lowest rate since the end of 2005, when the economy was reeling from the blows of the Gulf Coast hurricanes.