Nov. 16 (Bloomberg) -- Mexico's economic growth accelerated in the third quarter, spurred by construction projects and U.S. demand for manufactured exports such as automobiles.

Gross domestic product, the broadest measure of a country's output of goods and services, grew 3.7 percent from a year earlier, the fastest pace this year, after expanding 2.8 percent in the second quarter, the government said. Mexico's growth has quickened for two straight quarters, reversing a slowdown that began last year.

``Mexico's economy is strong,'' Omar Borla, a senior Latin America economist with Dresdner Kleinwort in New York, said in an interview. ``The third quarter shows a good recovery led by manufacturing and construction.''

Mexican Finance Minister Agustin Carstens said Oct. 29 that gross domestic product probably expanded about 4 percent in the third quarter. The country's economy showed a ``reassuring'' performance fueled by the service sector, general industrial production and automobile output, Carstens said.

The growth trailed the 4.1 percent median forecast in a Bloomberg survey of 21 economists.

Mexico's benchmark Bolsa index today rose 460.67, or 1.58 percent, to 29,631.57. The yield on the 10 percent bond due November 2036 rose 1 basis point to 8.15 percent. The price, which moves inversely to the yield, fell 0.13 centavo to 120.52 centavos per peso, according to Banco Santander SA.

Mexico benefited after U.S. economic growth unexpectedly picked up during the third quarter as exports rose and consumer spending offset declining home construction. U.S. GDP grew at an annual rate of 3.9 percent, the most in more than a year, the Commerce Department said last month.

U.S. Demand

Demand from U.S. manufacturers buoyed Mexican auto output, which surged 18 percent in the third quarter after 3.5 growth in the second quarter. In the first quarter, Mexican auto production plunged 12 percent.

A jump in Mexican government spending on construction also helped spur growth in the third quarter, said Delia Paredes, senior economist with the Mexico unit of Banco Santander Central Hispano SA, in an interview.

Construction output, which surged 6.9 percent last year on spending during an election year, accelerated 2.4 percent in the third quarter after rising 1.2 percent in the first.

``The government has reactivated its infrastructure agenda,'' Paredes said.

Infrastructure Spending

Increased spending on infrastructure will help Mexico ride out a U.S. slowdown, Carstens said Nov. 13. President Felipe Calderon hopes to spend $250 billion in his term on roads, energy and ports, more than a 50 percent increase over the combined public and private spending during the previous administration.

Tax legislation approved in September and deregulation of some industries may allow the government and companies to boost annual infrastructure spending from 3 percent of gross domestic product to 5.5 percent, Calderon said.

Mexico's Congress Nov. 12 approved the country's largest- ever spending plan, allowing for 2.57 trillion pesos ($235.7 billion) in outlays compared with a 2.34 trillion pesos approved for this year, adjusted for inflation.

`Well Equipped'

``The Mexican economy is very well equipped to weather a U.S. deceleration but it's not immune,'' said Guillermo Aboumrad, an economist with Banco UBS Pactual in Mexico City.

According to the IMF's World Economic Outlook released Oct. 17, Mexico's economic growth will fall to 2.9 percent this year from 4.8 percent in 2007. Growth in 2008 is forecast at 3 percent.

In the fourth quarter the U.S. economy is expected to decelerate to 1.5 percent, according to the median estimate of 73 analysts polled by Bloomberg between Nov. 1 and Nov. 8.

Mexico's economy is better positioned to withstand a slowing U.S. economy in part because of rising sales to Europe and Latin America, said Gray Newman, senior Latin America economist at Morgan Stanley.

Mexico's sales to the U.S. as a percentage of total exports peaked at about 90 percent in 2001 and since have fallen to about 80 percent, according to the statistics ministry.

According to a Morgan Stanley report published Oct. 22, the U.S. accounted for 41 percent of Mexico's total export growth in the first eight months of the year. Europe and Latin America accounted for 43 percent. In 2000, before the U.S. and Mexico went into recession, the U.S. accounted for more than 90 percent of Mexico's export growth, according to the report.

``There has been a decoupling of sorts if you look at the rate of growth of Mexican exports to non-us destinations, Newman said. ``It's pretty striking.''

Mexico's industrial production rose less than economists expected in September.

Output climbed 0.4 percent in September from the same month a year earlier after guerrilla bombings in the state of Veracruz cut natural gas service, forcing as many as 2,500 companies to suspend operations.

To contact the reporter on this story: Patrick Harrington in Mexico City at pharrington8@bloomberg.net

Last Updated: November 16, 2007 17:34 EST