US economy slows as housing market cools

WASHINGTON - A cooling housing market helped slow US economic growth in the second quarter more than earlier estimated, the government reported, 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. But 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.

The GDP report was seen as old news in financial markets. The Dow Jones industrial average added 29.21 points to end at 11,718.45 and the high tech-laden Nasdaq Composite Index rose 6.63 points to close at 2,270.02.

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."

The 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.

The GDP report showed inflation bubbling higher.

- REUTERS