Economy grows by 3.5 percent, signals recession may have ended
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By Neil Irwin, Washington Post Staff Writer
Thursday, October 29, 2009 9:52 AM
The U.S. economy roared to life in late summer, as gross domestic product rose at a 3.5 percent annual rate in the July through September period. It was the best quarter for growth in two years though analysts warned that it was fueled largely by government recovery programs.
The new data on GDP, which the Commerce Department released Thursday morning, is strong evidence that the recession that began in December 2007 ended sometime this summer. A formal determination will be made by a committee of economists based on a wider range of data, once more complete information is available.
GDP is the broadest measure of economic activity, capturing the value of goods and services made within U.S. borders during a given period. It was boosted in the third quarter by, among other factors, a jump in government spending driven in part by the federal stimulus bill passed in February, a rise in consumer spending following a year of steep declines, a steadying in the housing market, and businesses ramping up production to replace inventories that had become exceptionally low.
Much of that growth was attributable to government policy, including the stimulus bill, a range of government supports for housing, and the Cash for Clunkers program that boosted sales of automobiles. It is an open question what will happen to growth once those forces dissipate.
The report "shows we have clearly begun to emerge from the trough," said Bart van Ark, chief economist at the Conference Board. "But there's still a long way to go, and we still don't know enough about the sustainability of these recovery signals."
The strong GDP report is good news nevertheless, especially in contrast with the recent performance of the economy. GDP contracted at a 5.4 percent rate in the fourth quarter of 2008, a 6.4 percent in the first quarter and 0.7 percent in the second quarter. The 3.5 percent third-quarter gain was even better than economists had forecast. Many economists also expect GDP growth in the fourth quarter.
The data do not mean, however, that good times have returned for U.S. workers. The unemployment rate continued rising through the period in question, to 9.8 percent in September.
In effect, companies were able to make more stuff with fewer workers, squeezing more productivity out of those who remain.
As if underscoring the continued hard times for workers, the Labor Department said in a separate report Thursday morning that 530,000 people filed new applications last week for unemployment insurance benefits.
Personal consumption expenditures, which accounts for about two thirds of GDP, rose at a 3.4 percent annual rate in the third quarter, as Americans returned to stores -- especially auto dealerships. The rise in motor vehicle sales alone, propelled by the exceptionally popular Cash for Clunkers program, accounted for 1.7 percentage points of the 3.5 percent overall GDP gain.
Government spending rose at a 7.9 percent rate, reflecting the implementation of the American Reinvestment and Recovery Act passed in February. Despite help from the federal government contained in that law, however, state and local government spending and investment fell at a 1.1 percent rate.
Investment in housing rose at a 23.4 percent annual rate, meanwhile, an exceptional turnabout for a sector that has been dragging down growth for more than three years. Housing construction is still far below its boomtime level, but activity had fallen so far that even a modest uptick was enough for a large percentage gain.
The improvement in housing also was driven in part by a range of government policies, including an $8,000 first-time homebuyer tax credit, help for people at risk of foreclosure, and Federal Reserve action that reduced mortgage rates.
Another key part to the gains was businesses replenishing their inventories, depleted by a year of dramatically cutting back of production. Inventory rebuilding contributed 0.9 percent to GDP.
One negative to growth was from business investment, which continued its decline, falling at a 2.5 percent annual pace. Business investment in commercial real estate fell at a 9 percent rate, while spending on equipment and software edged up.