US economy slower than expected

Yesterday's economic data would have reinforced that view that the ECB is likely to remain the most aggressive in tightening monetary policy among the major central banks.

Reuters reports that the US economy slowed more than most economists expected in the third quarter.

Gross domestic product...expanded at a 1.6 percent annual rate during the third quarter, the Commerce Department reported on Friday. This was down from 2.6 percent in the second quarter for the slowest advance since the first quarter of 2003...

The report showed a striking 17.4 percent annual rate of decrease in spending on new housing - the biggest decline in 15-1/2 years.

But it is not all bad.

By contrast, the GDP report showed business investment remained healthy and consumers picked up their spending pace...

[T]here were signs that price rises might be easing. In the third quarter, core prices advanced at a 2.3 percent rate after rising 2.7 percent in the second quarter.

And it might get better soon.

A final October reading of the University of Michigan's consumer sentiment index came in at 93.6, up from a preliminary 92.3 and September's final reading of 85.4, said sources who saw the subscription-only report.

And Tim Duy puts the GDP report further into perspective.

In short, the GDP report is consistent with the Fed’s view on the economy: A slowdown in the housing sector, with minimal spillover into other parts of the economy, and moderating inflation numbers. For the Fed, these are “stay the course” numbers...

... I believe the risk of a hard landing is not insignificant, but recent data does not point in that direction. We are not seeing the hallmarks of a hard landing such as collapsing core durable goods orders, rising jobless claims, or plummeting consumer confidence. Without those signals, the Fed will stick to the soft landing story. Consequently, the Fed is not likely to view 3Q06 report as disastrous; they will view as in line with their expectations. Will those expectations be correct? Time will tell.

There were also downside surprises in Japan yesterday. Bloomberg reports that retail sales fell a larger-than-expected 1.4 percent in September while core prices excluding fresh food climbed a less-than-expected 0.2 percent in September.

In contrast, the euro zone data surprised on the upside. AFX/Forbes reports that M3 growth accelerated to 8.5 percent year-on-year in September from 8.2 percent in August while private sector loan growth accelerated to 11.4 percent year-on-year in September from 11.3 percent in August.