US emerges from long recession

October 30, 2009 04:04:45 PM

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The United States has emerged from a long and crippling recession, posting its strongest growth in two years in the third quarter as government stimulus spurred consumer spending, official data showed Thursday.

After four negative quarters, the world's largest economy grew at a seasonally adjusted 3.5-percent annual rate in the July-September period from the second quarter, the Commerce Department said.

The increase was the first since the second quarter of 2008 and the biggest expansion since the 2007 third quarter, when a US subprime mortgage crisis triggered a global financial crisis that subsequently hammered the world economy.

The department's first estimate of third-quarter gross domestic product (GDP), a broad measure of the country's output of goods and services, was better than the 3.2-percent reading expected by most analysts.

The expansion followed an unrevised 0.7 percent decline in the second quarter.

President Barack Obama welcomed the data as "an affirmation that this recession is abating and the steps we've taken have made a difference."

But, he warned: "We have a long way to go to fully restore our economy, and recover from what has been the longest and deepest downturn since the Great Depression."

"The benchmark I use to measure the strength of our economy is not just whether our GDP is growing, but whether we are creating jobs, whether families are having an easier time paying their bills, whether our businesses are hiring and doing well."

Unemployment remains a key hurdle to sustained recovery. The jobless rate rose to a new 26-year high of 9.8 percent in September and is expected to hit double digits. Since the official start of recession in December 2007, the number of unemployed has climbed by 7.6 million to 15.1 million.

While a recession is widely regarded as ended by one quarter of economic growth, in the United States the economy will not be officially out of recession until it has been declared by the National Bureau of Economic Research.

After shrinking a sharp 6.4 percent in the first quarter, the US economy has been on life support from the federal 787-billion-dollar emergency stimulus and other crisis measures.

"The recession is over, but don't be fooled by today's number -- the underlying rate of recovery is weaker," said Nariman Behravesh, chief economist at IHS Global Insight, who said that underlying growth was closer to 2.0 percent.

The third-quarter rebound was led by consumer spending, which accounts for two-thirds of US economic activity and added 2.36 percentage points to GDP growth. Other leading drivers were business inventories and home building.

Consumer spending surged 3.4 percent after a 0.9-percent drop in the second quarter, a rise the department said "largely reflected" auto purchases under the government's popular "cash-for-clunkers" program in July and August.

Dean Baker, co-director of the Center for Economic and Policy Research, noted that, excluding the auto sector, consumption grew at an annual rate of 1.0 percent.

"With disposable income falling due to continued job losses and declining hourly wages, and the reversal of the surge in car sales, consumption growth will almost certainly be negative in the fourth quarter," Baker said.

The Commerce Department reports September consumer spending data Friday. Most analysts expect it show a drop of 0.5 percent after a rise of 1.3 percent in August fueled by the "cash-for-clunkers" program.

Inflationary pressures remained tame in the third quarter. The core inflation rate -- which strips out volatile food and energy prices -- fell to 1.4 percent from 2.0 percent.

The Federal Reserve, which keeps a close eye on the GDP component, is widely expected to leave its key interest rate unchanged at nearly zero when policymakers meet on November 3-4.

"If we do indeed get a second consecutive quarter of good growth, there will be a lot of pressure on the Fed to start raising rates," said Joel Naroff of Naroff Economic Advisors.

"Indeed, I wouldn’t be surprised if the markets start pricing that into bond yields during the rest of the year."