Economy's Rebound Not As Strong As First Thought
November 24, 2009The economy grew at a 2.8 percent pace last quarter, as the recovery got off to a slower start than first thought.
The Commerce Department's new reading on gross domestic product wasn't as energetic as the 3.5 percent growth rate for the July-September period estimated just a month ago.
The main factors behind the downgrade: consumers didn't spend as much, commercial construction was weaker and the nation's trade deficit was more of a drag on growth. Businesses also trimmed more of their stockpiles, another restraining factor.
The new reading on GDP, which measures the value of all goods and services produced in the United States -- from machinery to manicures -- was a tad weaker than the 2.9 percent growth rate economists surveyed by Thomson Reuters had expected.
Still, the good news is that the economy finally started to grow again, after a record four straight losing quarters. The bad news is that the rebound, now and in the months ahead, probably will be lethargic.
The worst recession since the 1930s is very likely over, but the economy's return to good health will take time, Fed officials and economists say.
Growth probably won't be strong enough to quickly drive down the nation's unemployment rate, currently at 10.2 percent. It's only the second time in the post-World War II period that unemployment has topped 10 percent.
Some economists think economic growth will slow to around a 2.5 percent pace in the current quarter, although others say it could clock in at about 3 percent if holiday sales are better than expected.
Most say they think the economy will weaken again next year, with growth at a pace of around 1 percent as the impact of the $787 billion stimulus package fades and consumers keep tightening their belts under the strain of high unemployment and hard-to-get credit.
Much of the economy's return to growth last quarter reflected federal support for spending on homes and cars.
But Tuesday's report shows that some of that spending was a bit less robust than initially thought.
Spending on homes and other residential projects soared at an annualized pace of 19.5 percent last quarter, a little slower than the 23.4 percent rate first estimated. Spending on big-ticket "durable" goods -- including cars -- jumped at a pace of 20.1 percent, down from 22.3 percent.
Even with the downward revisions, it was notable that such spending grew, after falling in the previous quarter.
In the third quarter, the popular Cash for Clunkers rebates and an $8,000 tax credit for first-time homebuyers juiced up sales of cars and homes. The clunkers program ended in August, but the tax credit has been extended and expanded beyond first-time buyers.
What's not clear is whether the recovery can continue after government supports are gone.
If consumers clam up, the economy could tip back into recession. President Barack Obama recently cautioned that the economy could suffer a "double dip" downturn.
Fed Chairman Ben Bernanke, however, says he doesn't think that will happen. But last week the Fed chief did warn the recovery faces "important headwinds," such as tight credit and a weak job market that will make consumers cautious in their spending.
Those factors "likely will prevent the expansion from being as robust as we would hope," Bernanke said.
Tuesday's report showed that overall consumer spending -- a major shaper of national economic activity -- grew at a pace of 2.9 percent last quarter. That was down from a 3.4 percent growth rate first estimated, but still marked the best showing since early 2007.
On the business side, companies cut back spending on commercial construction -- a weak spot in the economy -- at 15.1 percent annualized pace. That was deeper than the 9 percent annualized cut back first estimated.
Businesses also trimmed stockpiles of goods by $133.4 billion last quarter, slightly more than initially estimated.
And the nation's trade deficit ended up shaving 0.83 percentage point off GDP last quarter, more than first thought.
Unlike past rebounds that were driven by the spending of everyday Americans, this one appears to hinge on spending by businesses, foreigners and -- until it runs out -- the government.
In an encouraging note on that front, businesses after-tax profits grew at a 13.4 percent pace last quarter, up from a 0.9 percent pace in the prior period, Tuesday's report showed.
In 1980, businesses led an economic recovery. It quickly fizzled, and the economy fell into a severe recession in 1981 and 1982. The unemployment rate climbed to 10.8 percent, the post-World War II high.
The government makes three estimates of economic activity for any given quarter. Each is based on more complete data. Tuesday's was the second reading of the third-quarter GDP data.
The return of economic growth puts the White House in a delicate position: Obama wants to take credit for ending the recession, but unemployment is still causing pain and anxiety nationwide.
Millions have yet to feel a benefit from the recovery in the form of a new job or even an easier time getting a simple loan. Even those with jobs are reluctant to go on a spending spree. The values of their homes and 401(k)s have not fully recovered.
Some economists think the jobless rate could climb as high as 11 percent by the middle of next year before making a slow descent. It could take at least four years for the unemployment rate to drop back down to more normal levels.
"The best thing we can say about the labor market right now is that it may be getting worse more slowly," Bernanke said last week.
Against that backdrop, Obama said he's weighing tax breaks that could encourage businesses to hire again.
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