Nov. 29 (Bloomberg) -- Economic growth in the U.S. surged in the third quarter before the full impact of the worsening housing recession and turmoil in credit markets took hold.

The world's largest economy grew at an annual rate of 4.9 percent, the most in four years, according to revised data today from the Commerce Department in Washington. The pace is a percentage point stronger than estimated last month and follows a 3.8 percent rate in the second quarter.

Consumers and businesses are spending less as home prices fall, energy costs rise and banks make getting loans more difficult and costly. Federal Reserve Vice Chairman Donald Kohn yesterday signaled he's open to lowering interest rates again following the deterioration in credit markets.

The odds of recession ``are much too close for comfort,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto, who correctly forecast the GDP revision. ``We are likely to see growth of less than 1 percent in the fourth quarter.''

Another government report showed the number of Americans filing first-time claims for unemployment benefits rose more than forecast to the highest in nine months, pointing to further slowing in the labor market.

Initial jobless claims increased by 23,000 to 352,000 in the week that ended Nov. 24, the most since February, the Labor Department said today in Washington. The number of people staying on benefit rolls was the highest in almost two years.

Treasuries Rise

U.S. Treasury securities held earlier gains after the reports. The benchmark 10-year note yielded 3.97 percent as of 8:54 a.m. in New York, down 7 basis points from yesterday.

Gross domestic product matched the median estimate of 75 economists surveyed by Bloomberg News. Estimates ranged from 3.9 percent to 5.5 percent.

The Commerce Department's report on new home sales, due at 10:00 a.m., is projected to show purchases declined in October. Investors and traders also await comments from Fed Chairman Ben S. Bernanke, who's scheduled to speak this evening.

Today's report is the second of three estimates released by the government for the quarter. The data will be revised again next month.

Profits Decline

The figures included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, fell 1.2 percent, the first decline since the last three months of 2006, to an annual rate of $1.62 trillion. Compared with a year earlier, profits were up 1.9 percent.

Income revisions for the second quarter also showed wages rose less than previously estimated. Personal income increased at a 3.8 percent annual pace from April through June compared with an initial projection of 5.3 percent.

A narrower trade deficit, a doubling in the inventory increase and more business investment than previously estimated contributed to the improvement in growth. The trade deficit narrowed to an annual pace of $533.4 billion, adding 1.37 percentage points to GDP, the most since 1996.

Growth Will Slow

``Stronger growth in the third quarter implies weaker growth in the fourth quarter due to a partial payback in both trade and inventories,'' Drew Matus, a senior economist at Lehman Brothers Holdings Inc. in New York.

Reports earlier this month suggested the economy will also have to contend with slower consumer spending and business investment.

Americans skimped on furniture and sporting goods in October to offset higher energy costs, leading to a 0.2 percent increase in retail sales, a Commerce Department report on Nov. 14 showed. Sales were boosted by a 0.8 percent jump in purchases at service stations that probably reflected higher gasoline prices. Excluding gas, retail sales were up 0.1 percent, the smallest advance in four months.

A Commerce report yesterday showed orders for durable goods fell more than forecast in October, signaling companies are losing confidence the economic expansion will be sustained.

Growth estimates for this quarter have dropped since the beginning of the month when the median forecast of economists surveyed by Bloomberg News called for a 1.5 percent rate of expansion.

Lehman Brothers projected the economy would grow at a 0.6 percent annual pace following the durable goods report and Morgan Stanley's estimate dropped to 0.3 percent.

`Tough Out There'

``It's relatively tough out there, particularly for the consumer and small business,'' Staples Inc. Chief Financial Officer John Mahoney said in an interview on Nov. 27. ``We've seen somewhat weakening demand throughout the year which we expect to continue through the first half of 2008.''

A worsening housing slump will be the biggest constraint on the economy well into next year, economists said. Declines in home construction have reduced growth since the start of 2006 and detracted 1 percentage point in the third quarter. Homebuilding will drop at a 22 percent annual pace this quarter, the most since the last three months of 1981, according to a Lehman forecast.

Retailers Pessimistic

Economic growth slowed in seven of the 12 Fed regions, with retailers ``slightly pessimistic'' about year-end holiday sales, the central bank said yesterday in its regional business survey known as the Beige Book. ``The national economy continued to expand during the survey period of October through mid-November but at a reduced pace.''

Kohn yesterday said market ``turbulence'' may reduce credit to businesses and consumers. ``We are going to have to take a look at'' the stress in credit markets ``when we meet in a couple of weeks,'' he said.

Trading in federal funds futures reflect a 100 percent probability the Federal Open Market Committee will cut rates on Dec. 11, to try to stabilize financial markets.

The GDP report's inflation measures were little changed from initial estimates.

To contact the reporter on this story: Courtney Schlisserman in Washington Cschlisserma@bloomberg.net

Last Updated: November 29, 2007 08:58 EST