Economic Reversal: GDP Grows At 3.5 Percent Pace

The U.S. economy posted growth at a 3.5 percent pace in the third quarter, the strongest sign yet that it may have shrugged off the worst recession since the 1930s.

The Commerce Department said the gross domestic product rebounded in the July-September period after contracting by 0.7 percent in the previous quarter. In the 12 months from June 2008 until last June, the economy retreated 3.2 percent, its worst performance in decades.

Tracking GDP

Percent change by quarter, annualized rate

The report was better than the 3.3 percent pace many economists had forecast. President Obama called the report "welcome news" but warned there was still a long way to go.

"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," the president told a group of small business owners in Washington.

The GDP report came as the Labor Department said first-time claims for jobless benefits fell slightly last week and that the total number of people on state unemployment rolls dropped sharply.

It is a strong sign that things are turning around, but many analysts are concerned that government stimulus programs, such as the Cash for Clunkers rebate program that spurred flagging auto sales, account for much of the growth.

The head of the White House Council of Economic Advisers said its analysis and that of a "wide range of private- and public-sector forecasters" showed that the government's stimulus program "contributed between 3 and 4 percentage points to real GDP growth in the third quarter."

"This suggests that in the absence of the Recovery Act, real GDP would have risen little, if at all, this past quarter," said Christina Romer, the chairwoman of the White House Council of Economic Advisers.

"After four consecutive quarters of decline, positive GDP growth is an encouraging sign that the U.S. economy is moving in the right direction. However, this welcome milestone is just another step, and we still have a long road to travel until the economy is fully recovered," she said.

But rising unemployment and continuing tight credit continues to put a damper on consumers and businesses trying to secure loans.

"For every person out of work, every family facing foreclosure, for every small business facing a credit crunch, the recession remains alive and acute," Treasury Secretary Timothy Geithner said Thursday.

Federal Reserve Chairman Ben Bernanke and White House officials have warned against scaling back the stimulus too soon over fears that the economy might not yet be able to stand on its own. They have warned that the unemployment rate — which currently hovers near 9.8 percent — could continue to creep up through 2010.

The concern persists despite the Labor Department's Thursday report that newly laid-off workers seeking unemployment insurance fell by 1,000 to a seasonally adjusted 530,000. The number of people continuing to claim benefits also dropped sharply, by 148,000, to 5.8 million. The figures on continuing claims lag initial claims by a week.

Jeff Rosen, an economist with Briefing.com, said the real test — whether the latest data change consumer attitudes — is yet to be seen.

"What will be interesting to see is if consumers take this as a sign that jobs are going to be coming back, and if businesses start to believe that consumers are going to start coming back and if production continues to ramp up through the end of next year," he said.

Two government incentives are likely to have given a boost to the third-quarter growth figures. Auto sales got a shot in the arm from the Cash for Clunkers program that gave a rebate of up to $4,500 to anyone trading in a gas guzzler for a new, more fuel-efficient vehicle. That program ended in August.

Meanwhile, home sales improved thanks in part to an $8,000 tax credit for first-time buyers. Congress is considering extending the credit, which expires Nov. 30.

"The challenge here is to get organic growth — growth that isn't helped by fiscal steroids," said Brian Bethune, economist at IHS Global Insight.

He said it's good to have the economy growing again, "but we don't think that rate of growth is sustainable because it is distorted by all the government stimulus."

From NPR and wire service reports

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