Economy Expands in 3rd Quarter, First Time in a Year - NYTimes.com

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By CATHERINE RAMPELL

Ending the longest contraction since World War II, the United States economy finally grew in the third quarter of this year, the Commerce Department said on Thursday.

The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the three months ending in September, matching the economy’s average annual growth rate from the last 80 years. But the end of government programs to encourage spending on things like cars and houses, alongside employers’ continued reluctance to hire more workers, means the recovery may not last, economists say.

“The big picture perspective is that things have improved,” said Jan Hatzius, chief United States economist at Goldman Sachs. “The question is, how sustainable is this growth going forward?”

Job-seekers, he says, probably will not see the benefits of a recovery for months to come.

The spike in G.D.P. came from a somewhat shrunken base. The economy had been falling for four straight quarters, bottoming with a 6.4 percent decline in the first three months of this year, the steepest quarterly fall since 1982.

Much of the growth in Thursday’s report can be attributed to the billions in federal aid devoted to economic renewal, economists say.

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“That alters the dynamic of a recession and a recovery, and what you’re left with, to some degree, is an artificial recovery,” said Dan Greenhaus, chief economic strategist at Miller Tabak, an investment research firm. “Over the next several quarters, the support for the economy on the part of the government wanes and the economy has to find its own footing.”

The cash-for-clunkers program helped increase consumer spending on durable goods, which grew by an annual rate of 22.3 percent in the third quarter compared to a decline of 5.6 percent in the previous quarter. Similarly, economists say the $8,000 federal tax credit for first-time homebuyers helped revive spending on housing, which increased 23.4 percent in the third quarter, in contrast to a decrease of 23.3 percent in the second quarter.

The economic growthcame without a major surge in inflation. The price index for gross domestic purchases, a broad measure of prices that Americans pay for goods and services, increased at an annual rate of 1.6 percent in the third quarter, compared with an increase of 0.5 percent in the second, the department said. Excluding food and energy prices, the inflation index rose 0.5 percent in the third quarter, compared with an increase of 0.8 percent in the second.

The stock market surged in reaction to the news, with major indexes up over 1 percent in early afternoon trading.

Thursday’s report will probably provide ammunition to both advocates and opponents of additional federal spending to stimulate certain parts of the economy, as mutually reinforcing pessimism among consumers and employers continues to fester.

On the one hand, the poor job market, along with wealth losses from housing and the stock market, is discouraging Americans from increasing their spending by too much. Consumer spending on nondurable goods like food and clothing, for example, increased 2 percent in the third quarter, compared with a decline of 1.9 percent in the second quarter.

Likewise, stagnant consumer demand and withering consumer confidence have left companies wary of hiring more employees — or, for that matter, taking any expensive risks. The jobless rate reached 9.8 percent in September, its highest rate in 26 years. According to Thursday’s report, business investment in buildings and other structures fell at an annual rate of 9 percent in the third quarter.

“At some point firms will have to begin to bring some of their workers back, but it may not be anytime soon,” said Joseph Brusuelas, director of Moody’s Economy.com. “That means 2010 may be a year of growth in the economy, but it’s likely to be characterized as jobless growth.” Initial jobless claims fell 1,000 in the week ending Oct. 24 to 530,000, according to a Labor Department report also released Thursday. The number has been trending downward, but is still well above claim levels historically associated with job creation, according to John Ryding, chief economist at RDQ Economics.

Such forces may pressure Washington to look for selective interventions in the labor market, in addition to last winter’s broader $787 billion stimulus package, much of which will be distributed next year. Proposals on the table include another extension in unemployment benefits and various job creation programs.

A slower drawdown in inventories was one bright spot in Thursday’s report, as it indicated that businesses have largely sold out their current stock and may rev up orders in the coming months to replenish supplies.

“Everybody had been dealing with a just-in-time status quo,” said Sandra Westlund-Deenihan, president and design engineer for Quality Float Works, a plant in Schaumburg, Ill., that manufactures metal float balls and valve assemblies. “They were living off inventories they’d built up over the last several years. Now they’ve drawn that down and reached a point where they may have to have it ready and back on the shelf again.”

Like many American manufacturers, Ms. Westlund-Deenihan says that international business has helped keep her company afloat. United States exports over all grew at an annual rate of 14.7 percent in the third quarter, while imports grew 16.4 percent.

“We’re seeing a strong rebound in trade simply because global trade had collapsed before,” said Robert Barbera, the chief economist at ITG.

Javier C. Hernandez contributed reporting.