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

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.

"We're going to lose those four percentage points over the next year, and so the private economy and the underlying organic growth path needs to pick up that much to offset it," she said.

GDP is the broadest measure of the nation's economic output, measuring the total value of goods and services produced within U.S. borders during a given period. A panel of economists will eventually decide when the recession ended based on a wide range of data.

It is common for the economy to begin expanding again well before the job market improves; the last recession ended in November 2001, for example, though job growth did not get back on track until late 2003.

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.

'No champagne' yet

"There's no champagne in our office until we start adding jobs, and not just adding jobs but adding enough that unemployment is going down," said Christina Romer, chairman of the Council of Economic Advisers, speaking to reporters at an event organized by the Christian Science Monitor.

President Obama, addressing small-business owners at the Eisenhower Executive Office Building on Thursday morning, said that "while this report today represents real progress, 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."

Congress, meanwhile, was moving Thursday to extend one of the support struts that contributed to third-quarter growth, expanding the first-time home-buyer tax credit that was part of February's stimulus bill -- and is scheduled to expire Nov. 30 -- into next year.

In the Senate, under a proposal that has gained bipartisan support, first-time buyers would receive an $8,000 tax credit if they signed a contract by April 30 and closed on it by June 30. The plan would also enable homeowners shopping for a new primary residence to receive a $6,500 tax credit if they owned their home for five consecutive years in the previous eight.

The proposal limits the purchase price to $800,000 and imposes income caps so that individuals who earn more than $125,000 annually and couples who earn more than $225,000 would not be eligible for the program.

The Treasury Department issued a statement Thursday endorsing the temporary extension of the first-time home-buyer credit, but did not take a position on whether the program should be expanded to include people who already own homes.

The Obama administration and Congress are also considering other steps that could help provide a continued economic boost, such as extending unemployment insurance benefits and making a $250 payment to Social Security recipients in 2010.

Staff writer Dina ElBoghdady contributed to this report.

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