US economic momentum slowed sharply in the third quarter, when growth came to 2.7 percent, but analysts foresaw a consumer-driven pickup in the final three months of the year and said the economy was headed for a soft landing.
Financial markets had predicted that after an expansion of 5.6 percent in the second quarter US gross domestic product would grow at annual rate of 3.5 percent in the July-to-September period.
The 2.7 percent pace announced Friday by the Commerce Department was the slowest since second quarter 1999 and was attributed to declines in government outlays and lower business capital spending.
For months now investors and analysts have been waiting to see if interest rate hikes by the Federal Reserve since June 1999 would succeed in tempering a red-hot economy without triggering a recession.
The slowdown reported Friday was widely seen in financial circles as hard evidence that the sought-after soft landing was at hand.
"You're going to see charges that the Fed has overdone it and has been overly aggressive in its tightening," said economist Wayne Ayers of Fleet Boston bank.
"But I don't think that's true. Consumption is still strong. The consumer has not given up the ghost. This is pretty much in line with what the Fed was hoping to see."
Consumer spending, responsible for two-thirds of US GDP, rose 4.5 percent in the third quarter after a 3.1 percent gain in the second, according to the Commerce Department.
Ayers and other economists said growth should rebound to between three and 3.5 percent in the fourth quarter -- not strong enough to induce Federal Reserve policymakers to raise interest rates any time soon,
"If the economy grows on average over the next year at around three percent, that is good, solid growth," Ayers said.
"It's not the kind of growth that is going to produce a 25 percent gain on the equity market but neither is it going to send the economy or the markets into a tailspin."
Analysts said the third quarter slowdown was helped along by a 10.1 percent decline in federal government spending as thousands of temporary census workers were let go.
While both government spending and business investment should accelerate in the fourth quarter overall growth should be held at sustainable levels thanks to an expected slowdown in business inventory growth.
Businesses built up their inventories by 79.9 billion dollars in the third quarter and 78.6 billion in the second, levels that threaten to put a damper on manufacturing in the fourth quarter.
Friday's report also contained promsing news on consumer prices, with one measure of inflation rising just 2.2 percent after a 2.1 percent gain in the second quarter.
Another inflation gauge, known as the chain-weighted price index, edged up a modest two percent in the third quarter after 2.4 percent in the second.
"Such small increases will reassure the Fed that there is no immediate need to tighten (monetary) policy further," said Henry Willmore of Barclay Capital.
But experts also cautioned that the report was not weak enough for the Fed to remove its "bias" against inflation.
While Fed policymakers have kept interest rates on hold at their last several meetings, they have warned that the "balance of risks" remain towards "heightened inflation" -- WASHINGTON (AFP)
© 2000 Al Bawaba (www.albawaba.com)
