Economy logs brisk 3.9% annual growth

WASHINGTON -- The U.S. economy grew at the fastest pace in 1-1/2 years in the third quarter as exports, consumer spending, business investment and defense outlays increased at a rapid clip even as the economy was being hit by turmoil in financial markets, the government said Wednesday.

But economists, including those at Global Insight, Moody's Economy.com and Wachovia, say a number of headwinds — such as the housing slump, rising energy prices and a slowing job market — currently are acting as a hefty drag on the economy. That will lead to softer growth at the end of 2007 and into 2008 than that seen earlier this year.

Gross domestic product, the broadest measure of economic activity within the nation's borders, rose 3.9% at a seasonally adjusted annual rate in the July-September period, the Commerce Department said. That was slightly better than the 3.8% gain seen in the second quarter and was the fastest gain since the first quarter of 2006.

"This may have been the summer of the housing market's discontent, but it clearly wasn't for the rest of the economy," Joel Naroff, president of Naroff Economic Advisors in Holland, Pa., said in a note to clients.

The gains in the economy were fairly broad-based:

•Consumers, the main engine of the U.S. economy, increased their spending 3% in the third quarter, up from 1.4% in the second quarter.

•Businesses boosted investment 7.9% following an 11% surge.

•Exports rose 16.2% in the third quarter, more than double the rate of increase in the second quarter and the biggest gain in nearly four years. Exports of goods rose at the fastest pace in more than a decade, in part reflecting a weakened dollar, which makes U.S. goods cheaper to buyers abroad, and strength in the worldwide economy.

•Defense spending rose 9.7% last quarter, the biggest gain since the end of 2006, the government said.

Housing, however, continued to be a negative for the economy in the third quarter. Home-building fell for the seventh consecutive quarter in the July-September period and subtracted a full percentage point from GDP.