A cooling housing market helped slow US economic growth in the second quarter more than earlier estimated, the government reported on Thursday, and may curb expansion for the rest of the year.
With November congressional elections on the horizon, a top White House official played down worry about a lasting broad-based slowdown. However, some analysts said weaker home sales, prices and building cast a shadow over longer-term prospects.
Gross domestic product, which measures total economic activity within the United States, advanced at a revised 2.6 per cent annual rate in the second quarter, down from the 2.9 per cent estimated a month ago, the Commerce Department said.
That was less than half the first quarter's 5.6 per cent rate.
Financial markets largely dismissed the GDP report as old data. By late morning, stocks had shed early gains as investors took profits from a rally earlier in the week and bond prices similarly were modestly lower on profit-taking.
The Commerce Department cited weaker inventory-building than they first estimated and a higher volume of imported services - which detract from domestic output - as the key reasons for revising down second-quarter performance.
The GDP report underlined how a cooling housing sector is affecting the overall economy. Investment in residential structures tumbled at the sharpest rate in more than a decade - down at a revised 11.1 per cent rate instead of the 9.8 per cent reported a month ago.
It was the third straight quarter in which spending on new housing declined and department officials said it was the biggest quarterly drop since a 12.2 per cent fall in the second quarter of 1995.
The chairman of the White House Council of Economic Advisers, Edward Lazear, acknowledged the impact of softer housing during an appearance before the Senate Budget Committee.
It appears that the housing slowdown will be a significant drag on third-quarter growth, Lazear said. It is important to note, however, that the weakness in the housing sector does not seem to be spreading to other sectors of the economy.
There was some evidence of the housing sector's limited spillover in a separate report from the Labour Department. New claims for unemployment pay dipped 6,000 last week to a seasonally adjusted 316,000, a level economists consider shows a healthy hiring environment.
The US Federal Reserve in August suspended a cycle of interest-rate rises that it had initiated in mid-2004 and some analysts think it may cut rates early in 2007 if the housing slump deepens.
The housing issue is a bigger issue than many will give credit and we think GDP will be soft for longer than anyone expects, said Robert Lutts, chief investment officer for Cabot Money Management in Salem, Massachusetts.
Economic activity has benefited in recent years from liberal spending by consumers enjoying the wealth effect from rising housing prices but that is fading as sales wither.
The GDP report showed inflation bubbling higher.
A prices gauge favoured by the Fed - personal spending excluding food and energy items - rose at a revised 2.7 per cent rate instead of the 2.8 per cent reported a month ago. That topped the first quarter's 2.1 per cent and was the highest since 2.8 per cent in the first quarter of 2001.
Corporate profits barely grew by a revised 0.3 per cent in the second quarter rather than the 2.1 per cent the Commerce Department estimated a month ago. That was a steep plunge from a 14.8 per cent rate of profit growth in the first three months of this year.
Businesses continued to increase their investment in new operations during the second quarter, but not as strongly as first thought and far less robustly than in the first three months of the year. So-called nonresidential spending was up 4.4 per cent instead of the 4.7 per cent estimated a month ago and was less than a third the 13.7 per cent rate of growth posted in the first quarter.
Policy-makers have been preparing the ground for an easing in growth while stressing they expect it to be temporary.
In an interview with Reuters on Wednesday, Richmond Fed Bank President Jeffrey Lacker said growth is going to be a bit below par for a quarter or two, maybe longer, but I'm looking for it to return to potential next year.
Similarly, Kansas City Fed Bank President Thomas Hoenig said on Wednesday night he was anticipating growth will bounce back - but still stay below trend - in 2007 after dipping to an annual rate in the second half of 2006 of two per cent to 2.5 per cent.