With big government boost, U.S. economy grew in 3rd quarter

Gross Domestic Product
By Neil Irwin
Washington Post Staff Writer
Friday, October 30, 2009

The U.S. economy roared to life this summer, as an array of government actions led to the strongest quarter of growth in two years.

The Commerce Department reported Thursday that the nation's gross domestic product rose at a 3.5 percent annual rate in the July-through-September quarter, the clearest evidence yet that the country has begun to emerge from the deepest downturn in decades.

But there were few signs in the new data that the private sector will be able to sustain that growth once the government pulls back, or that the rise will soon translate into an improving job market.

The unemployment rate has continued rising in recent months, to 9.8 percent in September, as businesses remained reluctant to hire.

"We've had a technical end to the recession, which is something that economists and bankers like to talk about," said Robert A. Dye, senior economist at PNC Financial Services Group. "But it's not going to feel like we've had an end to the recession on Main Street until unemployment starts to go down."

Wall Street, nevertheless, was cheered by the better-than-expected numbers, and the Standard & Poor's 500 rose 2.3 percent Thursday.

The renewed growth of the U.S. economy -- which followed a 6.4 percent rate of contraction in the first quarter and a 0.7 percent decline in the second -- was driven by sweeping government interventions, including the "Cash for Clunkers" program to stimulate auto sales, a first-time home-buyer tax credit and other policies to stimulate housing, and the rollout of federal stimulus spending.

Economists are wary about what happens as those programs recede. Cash for Clunkers is already over, Congress is looking to extend the home-buyer tax credit through the first part of next year, and stimulus spending is set to taper off over the course of 2010.

Government-led growth

For the expansion to be sustained -- let alone accelerate enough to create steady job growth -- businesses must gain enough confidence to invest in the future, consumers will need to once again make purchases absent government incentives, and buyers of American products abroad will need to open their wallets, economists said.

Progress on those fronts is mixed. The good news is that the deck is now cleared for a recovery. Businesses, having slashed their inventories for six of the last seven quarters, are now rebuilding them. Housing investment, having subtracted from the economy for three straight years, is now ticking up. Even business investment in equipment and software perked up, after six straight quarters of decline.

The bad news is that loans are still hard to get and businesses have become highly risk-averse. Moreover, investment in commercial real estate and other development continues to decline rapidly.

Jan Hatzius, chief U.S. economist of Goldman Sachs, said the government's fiscal intervention and efforts by businesses to rebuild inventories probably contributed about four percentage points to GDP growth.

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