WASHINGTON – The deteriorating housing market forced the White House to lower its projection for economic growth next year and raise its forecast for unemployment. Inflation was expected to moderate.
The new forecast came as the Commerce Department reported Thursday that the economy barreled ahead in the summer at a 4.9 percent growth rate, the strongest showing in four years. That impressive performance, however, wasn't expected to last through the current quarter, given the strains of the housing slump and credit crunch — problems likely to weigh on individuals and businesses alike.
Under the administration's new forecast, the gross domestic product, or GDP, will grow by 2.7 percent next year. Its old projection called for a stronger, 3.1 percent increase.
"The housing market decline has been more significant than we expected," said Edward Lazear, chairman of the White House Council of Economic Advisers.
The more pronounced housing slump — along with the expectation that problems will persist into next year — was a big factor in the administration's downgrade of its economic growth forecast for 2008.
In the third quarter alone, builders slashed investment in housing projects by a whopping 19.7 percent, on an annualized basis, the biggest cut in a year. That lopped just over a full percentage point off GDP from July through September.
Lazear said he expects the drag from housing on the economy to continue "at least through the first half of 2008." He also noted that the credit situation seems to have gotten "a bit worse again" in the last few weeks.
The pickup in overall national economic activity in the third-quarter — while a testament to the economy's resilience— didn't change the picture forming in the current October-to-December quarter. That scenario is somewhat grim, with indications the economy will lose considerable steam. Growth is expected to clock in at a pace of just 1.5 percent or less in the final three months of this year.
"Turn out the lights the party is over," said Richard Yamarone of Argus Research. "Fourth quarter growth is not going to be anywhere near the third-quarter's pace. It is going to be miserable, but we'll escape a recession."
GDP is the value of all goods and services produced within the United States and is the best measure of the country's economic health.
Federal Reserve officials and other economists — looking at fresher barometers of economic activity — have warned that the economy is in for a rough patch.
The Fed has lowered interest rates twice this year — in September and late October — to keep the housing collapse and credit crunch from throwing the economy into a recession. Since then financial markets have suffered through another period of turmoil, the housing slump has deepened and consumer confidence has tanked. The odds of another rate cut in December are rising, analysts said.
Businesses largely carried the economy in the third quarter, with U.S. exports powering growth. Consumer spending was somewhat subdued.
The big worry is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, the Bush administration, Fed officials and many economists remain hopeful the country will weather the financial storm without falling into recession.
"We may see slowing of the growth, but we'll still see growth," Commerce Secretary Carlos Gutierrez said in an interview with The Associated Press. Will there be a recession? "We don't see that," he said.
Treasury Secretary Henry Paulson agreed. "While the difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the U.S. economy has many strengths, and I expect the expansion to continue," Paulson said.
With economic growth slowing, the unemployment rate is projected to move up to 4.9 percent next year. That's up from a previous forecast of a 4.7 percent jobless rate but still would be considered fairly low by historical standards. The unemployment rate last year dipped to 4.6 percent, a six-year low.
Inflation, however, should improve. The White House expects consumer prices to increase by 2.1 percent next year, a moderation from a previous forecast of a 2.5 percent rise. That's encouraging news as oil prices have marched past $92 a barrel.
For this year as a whole, the White House expects the economy to grow 2.7 percent, helped by the strong third-quarter performance. The new projection for growth this year is up from a previous estimate of 2.3 percent. The economy grew by 2.6 percent last year, as measured from the fourth quarter of the previous year. The White House's projections are based on the fourth quarter of one year compared with the fourth quarter of the previous year.
In other economic news:
— The number of new people signing up for jobless benefits last week jumped sharply, suggesting that employment conditions are softening. The Labor Department said new applications filed for unemployment insurance mushroomed by 23,000 to 352,000.
— New-home sales nudged up 1.7 percent in October from September to a pace of 728,000. Still, sales have plunged 23.5 percent over the last 12 months. The median sales price of a new home fell to $217,800. That was down 13 percent from a year ago. It was the biggest annual decline in 37 years.
"Yes, new home sales did rise in October. But let's end the joy right there. This was not a good report," said Joel Naroff of Naroff Economic Advisors.