S economy returns to growth in 3Q after deep slump

Written by Reuters
Friday, 30 October 2009 06:49

WASHINGTON: The U.S. economy grew in the third quarter for the first time in more than a year as government stimulus helped lift consumer spending and home building, fueling an unexpectedly strong advance, according to Reuters on Thursday, Oct 29.

Signaling the end of the worst recession in 70 years, the Commerce Department on Thursday said the economy expanded at an annual rate of 3.5 percent in the July-September period, snapping four down quarters with its fastest growth pace since the third quarter of 2007.

The report buoyed global stock markets, which were also cheered by improving third-quarter corporate earnings, including higher-than-expected profits from consumer product giants Procter & Gamble Co and Colgate-Palmolive Co.

It raised hopes for further improvement in corporate profits and sent stocks on Wall Street rallying after four days of losses. The Dow Jones industrial average and the Standard & Poor's 500 Index notched their biggest percentage gains since July 23.

Prices for U.S. government debt and the U.S. dollar fell as traders exited safe havens.

"The economy has emerged with gusto from the deepest recession since World War Two," said Harm Bandholz, economist at UniCredit Markets and Investment Banking in New York. "The short-term prospects for the economy remain good."

Economists polled last week had expected a 3.3 percent GDP gain, but many had cut those estimates in the past couple days. As it turned out, growth was fairly broad-based with solid gains in consumer spending, exports and home CONSTRUCTION [].

But it was also driven by emergency government programs like the popular "cash for clunkers" incentive for new auto purchases and an US$8,000 tax credit for first-time home buyers.

The auto discount program ended in August and the home tax credit is due to expire next month, although Congress is working on a plan to extend it.

Stripping out auto output, the economy would have expanded at only a 1.9 percent rate in the third quarter.

In the absence of government support, there are fears the brisk growth pace will not extend into coming quarters, with rampant unemployment also inflicting damage.

"The economy is entirely dependent on federal deficit spending at the moment. But the stimulus will not fade right away ... that means we can rely on solid growth continuing through the first quarter of next year," said Chris Low, chief economist at FTN Financial in New York.

"Once the government steps aside, growth is likely to fall back to a 1 to 2 percent rate of growth."

The United States is entering recovery following in the footsteps of major economies like China and the euro zone. - Reuters