U.S. growth rate revised upward

The U.S. economy grew faster than first thought in the third quarter thanks to strong business investment, but investment in housing posted its biggest decline in more than 15 years, the government said Wednesday.

Gross domestic product, which measures total economic activity in the U.S., expanded at a 2.2% annual rate during the third quarter, higher than the 1.6% gain previously estimated and above Wall Street expectations for a 1.8% gain. The Commerce Department issued its initial report last month.

The housing market picture beyond the July-through-September quarter thus far does not look very bright, with data released Wednesday showing an unexpectedly sharp drop in sales of new homes during October.

After-tax corporate profits during the quarter were far stronger than expected, rising 4.6% after a scant 0.3% increase in the second quarter. Economists had been expecting a third-quarter gain of 0.4%.

“This kind of cools the talk that the economy is edging closer to the brink of recession,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

The third-quarter increase in GDP was still weaker than the 2.6% advance in the second quarter -- and the weakest since Gulf Coast hurricanes held down economic activity in the fourth quarter of last year.

And some analysts said the report was not quite as strong as it appeared, noting that more of the quarter’s output went into inventories than previously believed, while consumer spending was a touch softer.

“Most of the revisions came from inventory and a narrower trade deficit,” said Lara Rhame, senior currency strategist at Credit Suisse in New York. A narrower trade deficit suggests that a greater proportion of goods and services was produced in the U.S. rather than overseas, thus adding to overall U.S. economic growth.

Even so, business spending in the third quarter was stronger than first thought, advancing at a 10% annual rate, up from the 8.6% rise first estimated. Business spending on inventories rose, increasing sharply to a $58-billion rate from the $50.7 billion previously estimated.

Investment in housing tumbled 18% during the quarter, a slightly bigger decline than the 17.4% decrease in the government’s earlier estimate. It was the biggest decline since a 21.7% decrease in the first quarter of 1991.

Providing further evidence of housing market weakness, a separate Commerce Department report showed that sales of new homes dipped 3.2% in October, bringing up the supply of homes for sale to seven months’ worth. Compared with a year earlier, new-home sales were down 25.4%.

In addition, many parts of the United States saw housing market activity continue to slow from mid-October into the first three weeks of this month, according to the federal “beige book” report, which was released Wednesday. The report of economic anecdotes will be weighed by Federal Reserve policymakers when they meet Dec. 12 to decide whether to hold benchmark interest rates steady at 5.25%.

Several regions watched by the Federal Reserve showed expectations of weak housing market conditions for several months.

Consumer spending, which accounts for roughly two-thirds of national economic activity, advanced at a 2.9% annual rate during the quarter, a weaker reading than the 3.1% advance first estimated.

A key inflation measure favored by the Federal Reserve -- reflecting the costs of personal expenditures, excluding food and energy -- advanced at a 2.2% rate during the quarter, down slightly from the 2.3% first estimated and close to Wall Street expectations.

The same gauge indicated prices were up 2.4% from a year earlier, an increase equal to the one first estimated and the highest inflation rate since 1995.