Big surprise.

Goldman Sachs'

(GS) - Get Report

third-quarter earnings beat analysts expectations, an indication that Wall Street is still humming despite increasing worries of an economic slowdown.

In the quarter, the big Wall Street investment firm earned $1.59 billion, or $3.26 a share, down slightly from a year ago, when Goldman Sachs earned $1.62 billion, or $3.25 a share. The firm, which has been buying back stock, had more shares outstanding in the year-ago quarter.

Net revenue rose 2% to $7.46 billion, led by a big year-over-year gain in revenue from investment banking activities and interest income. Investment banking revenue rose 29% from a year ago to $1.29 billion.

The current quarter included cash expense related to an accounting treatment for employee stock awards. Without that expense, Goldman Sachs says it would have earned $1.68 billion, or $3.45 a share.

Analysts, as surveyed by Thomson Financial, were predicting earnings of $2.97 a share on revenue of $7.17 billion.

In recent weeks, brokerage analyst have been paring back third-quarter estimates for Goldman Sachs and three other Wall Street firms that report in the coming days:

Lehman Brothers

(LEH)

,

Bear Stearns

(BSC)

and

Morgan Stanley

(MS) - Get Report

.

Traditionally, the third quarter is the weakest one for Wall Street firms. But analysts suspected business might be even slower for Wall Street this time around because of a lackluster summer market for IPOs and an expected decline in revenue from proprietary trading.

Over the past two years, Goldman Sachs and other big Wall Street firms, however, had made a habit of widely beating analyst expectations.

In fact, revenue from trading and principal investments did take a big hit at Goldman Sachs in the third quarter, falling 7% from a year ago to $4.7 billion. On a quarter-to-quarter basis, revenue from trading and investments were down 32% from the second-quarter of this year.

Revenue from stock trading were hit particularly hard, tumbling 50% from the second quarter to $707 million.

Trading revenues at Goldman Sachs includes revenues from trades made for its customers and dollars earned by the firm's big team of proprietary traders.

In the quarter, Goldman Sachs' closely watched value at risk measurement remained relatively high. The third quarter VAR was $92 million, down slightly from the prior quarter's $112 million, but up substantially from the $76 million at risk in the third quarter of 2005.

The VAR is a measurement of how much money Goldman Sachs could lose in a single day of trading, if all its bets went against it. It's a measurement of how much money a firm is willing to gamble on its proprietary traders.

But the slack in Goldman Sachs' trading operation was offset by gains from investment banking. Compared to a year ago, fees from advising on corporate deals rose 9% to $609 million. Fees from stock and bond underwriting rose 49% to $679 million.

However, on a sequential basis, revenue from investment banking fell by 16%.