Stock Market Losing Momentum

US economic growth slowed to an annualized rate of just 1.6% in the third quarter of 2006. Housing and the oil-fuelled rise in imports remain the primary factors for dragging down the economic activity. The news of the slowdown comes at a bad time for the Republican party, which has been leaning on its economic record to regain its support damaged by the war in Iraq.

Growth in the third quarter was the slowest since early 2003. However, strong consumer spending ensured the economy continued to expand, though below its potential growth rate. Inflation pressures were eased a little, with the core personal consumption expenditure deflator growing at an annualized rate of 2.3%, down from 2.7%.

Most analysts predict growth to rebound in the current fourth quarter, as lower oil prices depress imports, though it will probably remain below trend.

Figures from the eurozone showed growth in lending to the private sector equaled its highest rate since the launch of the euro in 1999. This highlights robust economic activity in Europe but raising expectations of possible further interest rate rises by the European Central Bank.

Democrats seized on the weak US third-quarter growth figures as evidence that the US
was “on the wrong track.” However, Hank Paulson, the Treasury secretary, rejected weak third-quarter growth as a “blip”.

According to Carlos Gutierrez, the commerce secretary, the capacity of the economy to absorb the correction in housing is another example of how flexible and how strong this economy is.

Although growth is lower than expected, it is unlikely to prompt the Federal Reserve into early consideration of interest rate cuts. Fed issued a statement saying: “Going forward, the economy seems likely to expand at a moderate pace.” The statement is being seen as a pre-emptive strike ahead of the third-quarter growth report.