Economic growth brisk, more jobs seen

WASHINGTON (Reuters) - The economy grew at a surprisingly brisk clip in the third quarter, the government said on Wednesday in one of a series of reports that implied a resilient expansion despite a battered housing sector.

Strong consumer spending and brisk exports helped push third-quarter gross domestic product ahead at the fastest rate since the beginning of 2006, while there also were signs private employers were still building up payrolls.

GDP measures total production within U.S. borders. It grew at a 3.9 percent annual rate in the July-September quarter, up from 3.8 percent in the second quarter. It was the strongest growth since 4.8 percent in the first quarter of 2006.

The Federal Reserve announced at the end of a two-day meeting of its policy-setting Federal Open Market Committee that it was reducing its benchmark federal funds rate a quarter percentage point to 4.5 percent, citing its expectation that "economic expansion will likely slow in the near term" because of the housing sector's problems.

The Fed noted that growth was "solid" in the third quarter and said it thought financial-market strains were easing, but still opted for some insurance to add stimulus.

Analysts noted the vote to lower rates was a spit one, 9-1, and said it likely meant the Fed was unlikely to cut rates again any time soon unless the economy deteriorates sharply.

The GDP report showed that spending on housing construction declined for a seventh straight quarter. A separate Commerce Department report issued later -- on September construction spending -- said total spending was up 0.3 percent in September but residential spending slumped for a 19th straight month.

WORRIED, BUT STILL SPENDING

Though surveys show consumer confidence has suffered as housing prices and building wither, they still opened their wallets over the course of the summer.

Consumer spending grew at a 3 percent annual rate in the third quarter, up from 1.4 percent in the second quarter, a powerful stimulant since consumers fuel about two-thirds of national economic activity through their purchases of goods and services.

Stock prices rose after the Fed rate decision, with The Dow Jones industrial average closing up 1 percent, or 137.54 points. Bond prices extended losses as investors wrestled with the possibility that interest rates may be on hold for some time. The yield on the benchmark 10-year note, which moves inversely to price, rose to 4.48 percent from 4.39 percent late on Tuesday

The Labor Department said employment costs -- a key determinant of the costs of production and potentially of inflation -- rose a smaller-than-expected 0.8 percent in the third quarter, slowing from a 0.9 percent gain in the second quarter.

Separately, a closely watched report from ADP Employer Services estimated that private employers added 106,000 jobs in October. The private employment service's estimate was well ahead of forecasts among economists surveyed by Reuters for 60,000 jobs and implied the economy had more underlying strength than many had previously thought.

SOME WEAK SPOTS

There were a few signs of stress.

A report from the National Association of Purchasing Management said its Chicago business barometer fell to 49.7 in October from 54.2 in September, its first drop since February.

Also, U.S. crude oil futures surged more than $3 a barrel to above $90 -- a threat to costs throughout the economy as well as to consumers who face steadily rising prices at the gasoline pump.

The GDP report showed exports jumped in the third quarter at a 16.2 percent rate, the strongest increase since the fourth quarter of 2003 and a sign that a falling U.S. dollar is making American-made goods cheaper and more attractive to foreigners.

Prices rose more rapidly in the third quarter, with the so-called core index of personal consumption expenditures, which excludes food and energy items, climbing at a 1.8 percent rate. That compared with 1.4 percent rise in the second quarter and begins to push the boundary of the 1-percent to 2-percent rate for core price rises that is widely considered to be acceptable to Fed policy-makers.

Inventories of unsold goods also accelerated in the third quarter, to an annual rate of $15.7 billion compared with $5.8 billion in the second quarter.

Some of the build-up may represent stocking up for the coming holiday season between Thanksgiving and Christmas although inventories may also accumulate if sales of some goods begin to lag. In either case, however, rising inventories add to growth in the period in which they occur.

(Additional reporting by Alister Bull in Washington and Steven C. Johnson, John Parry and Ellen Freilich in New York)