US economy grows at fastest rate in four years during Q3, jobless claims up

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WASHINGTON, Dec 23 (Reuters): The US economy grew at its fastest rate in four years during the third quarter, the government confirmed Thursday, but a surge in new claims for jobless benefits showed the labour market is softening.
The Commerce Department said gross domestic product, which measures the total output of goods and services within US borders, expanded at a 4.9 per cent annual rate in the third quarter, the same as it estimated a month ago and the strongest since the third quarter of 2003.
The effects of the subprime mortgage crisis and the housing slump worsened during the quarter-and continue to cut into the outlook for growth.
President George W Bush, speaking at a news conference, said the economy remained fundamentally strong but also said he was willing to consider all options to give growth a boost.
A separate report from the conference board, which showed its index of leading indicators weakening sharply for a second straight month in November, underlined the speed of the slowdown. Seven of the private-sector research group's 10 measures of economic activity decreased from October.
In another sign of a continuing slide, the Philadelphia Federal Reserve Bank said factory activity in the Mid-Atlantic region fell to a four-year low in December. Its business activity index dropped to minus 5.7 in December-lowest since April 2003 and far below forecasts-from 8.2 in November.
The Labour Department said initial claims for jobless benefits rose 12,000 last week to 346,000 and the four-week moving average of claims-a more reliable gauge of labor market conditions-hit its highest in more than two years.
Higher exports and increased inventory-building accounted for the pickup in third-quarter growth from the second quarter's 3.8 per cent pace, but many economists forecast that fourth-quarter expansion will slow to 1 per cent or less.
Stock prices rose modestly, reacting to favourable corporate earnings rather than the economic data. Bond prices were steady to slightly lower as investors largely remained on the sidelines.
Analysts said the economic outlook was darkening.
"All in all, the fourth quarter seems headed for between zero and 1 per cent growth, and as the credit squeeze tightens its grip, we expect little different in the first quarter," said economist Nigel Gault of Global Insight Inc in Lexington, Mass.
Economist Kurt Karl of reinsurer Swiss Re in New York said that, based on the economy's current performance, the third-quarter GDP figure seemed "outrageously unrealistic" and that the economy's direction looked increasingly perilous.
The Manufacturers Alliance/MAPI said in its quarterly report that the housing market troubles will probably cause the manufacturing sector to experience "turbulent times" next year. The nonprofit research group said it expects housing starts to fall 28 per cent in 2008, foreshadowing the worst housing market in the post-World War II period and preventing manufacturing from growing.
The GDP report showed spending on new-home building contracted at a 20.5 per cent rate during the third quarter, the steepest quarterly fall since the start of 1991 when the economy was headed toward a recession.
A price gauge closely watched by the Fed-personal consumption spending excluding food and energy-rose at a revised 2 per cent rate, well ahead of the 1.4 per cent pace posted in the second quarter. Helped by a weaker dollar that makes US-made goods cheaper for foreigners, exports rose at a revised 19.1 per cent rate, the strongest since the final quarter of 2003 and more than twice the second quarter's 7.5 per cent rate of increase.
Companies increased their inventories during the third quarter at a $30.6 billion annual rate-slightly less than the $32.9 billion clip estimated a month ago but five times the $5.8 billion rate of increase posted in the second quarter.
Separately, the Chicago Federal Reserve Bank said its National Activity Index declined again in November, though less rapidly than it did in October.
The index-a weighted average of 85 indicators that covers production, consumption and housing as well as sales, factory orders and inventories - - has been negative, indicating below- trend growth, since August.