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The U.S. economy expanded in the third quarter after shrinking for four consecutive quarters, marking an apparent end to the worst recession since World War II. But the recovery is expected to be slow and painful, as companies shed jobs and credit remains tight.
Gross domestic product expanded at a 3.5% seasonally adjusted annual rate in the quarter ended in September, a rise that leaned heavily on government spending. Some of the largest components of growth came from spending on cars and house building -- two areas propped up by federal programs.
Without stimulus programs such as "cash for clunkers" and a first-time homebuyer's credit, "real GDP would have risen little, if at all, this past quarter," Christina Romer, president of the White House Council of Economic Advisers, said in a statement.
President Barack Obama warned: "We have a long way to go to fully restore our economy."
The economy's performance nonetheless sent stocks soaring just shy of the 10,000 level. The Dow Jones Industrial Average closed up 199.89 points, or 2.05%, to 9962.58, its biggest one-day point gain since July 15.
An end to the recession -- that is, a sustained halt to the decline in economic activity -- wouldn't immediately lift the fortunes of the nation's 15.1 million unemployed. But it is the first step on the path to recovery.
Thursday's report on GDP -- a broad measure of the economy that sums up all the goods and services produced in the U.S. -- frames an economy that has started to emerge from the recession. The housing market is at or near a bottom, economists say, and metrics from manufacturing output to consumer spending have recovered from the deepest levels of the downturn.
Still, with so much of the growth relying on government spending -- and many of these programs either expired or expiring -- it is unclear if consumers and businesses have regained the strength to propel the economy on their own. Businesses remain cautious, and U.S. households are still burdened by a mountain of debt, two factors that have many economists predicting growth will slow considerably in the coming months.
Indeed, economists warned that the third-quarter figure overstated the strength of the underlying economy. Of the 3.5% growth, about one percentage point came from sales of motor vehicles and parts. Auto sales were accelerated by the "cash for clunkers" trade-in program.
Without government support, GDP growth "would have been a much less inspiring number than it was," says Alan Levenson, chief economist at T. Rowe Price. Still, "we're not going to keep growing at 3.5%, but we're going to keep growing."
Private residential investment, of which home building is a big component, surged 23.4%, the first increase since the last quarter of 2005. That accounted for half a percentage point of GDP growth. The category was puffed up by home builders who rushed to finish new houses before the expiration of the federal government's $8,000 tax credit for first-time home buyers.
Companies also reduced their inventories at a much slower rate than in the previous quarter, when businesses were slashing their stocks to cope with falling consumer demand. In the tricky accounting of GDP, a slower reduction of inventories contributed nearly a full percentage point of growth, but the gain from inventories is likely to lessen over the next few months
While businesses have started to recover from the deep drops during the recession, many don't expect demand to rocket back to pre-recession levels. The tepid pace of recovery, combined with productivity increases that make it possible for businesses to handle more demand with fewer employees, is a big reason why firms have continued to shed employees even as the recession abates. The Labor Department reported Thursday that last week, initial claims for unemployment insurance fell by 1,000 to a seasonally adjusted 530,000.
Gaylord Entertainment Co., an owner and operator of big convention hotels such as Opryland Resort and Convention Center in Nashville, Tenn., has seen convention bookings improve from the depressed levels of last year. But improvement is relative in this economy. The company's cancellation and attrition rate peaked at about 17% in the first quarter of 2009 and fell to 14% in the second quarter. The company says it expects attrition to keep improving in the third quarter.
"The decision makers around meetings are very cautious about the future and aren't yet ready to take on the risk of signing up for much bigger attendance," says David Kloeppel, the company's president and chief operating officer.
The beginnings and ends of U.S. recessions are declared by the National Bureau of Economic Research, a nonprofit research group that defines recession as "a significant decline in economic activity spread across the economy, lasting more than a few months." The group says the current downturn started in December 2007, and it isn't likely to declare an end for some time. Still, Jeffrey Frankel, a Harvard professor and a member of the NBER's Business Cycle Dating Committee, says the recession is likely over.
"My best guess is that we will end up declaring the trough [of the recession] was in the middle of the year sometime," he said.
The Federal Reserve's preferred measure of inflation -- the price index for personal consumption expenditures, excluding volatile food and energy prices -- slid to 1.4% annual rate from 2.0% in the second quarter. The subdued price increases give the central bank the leeway to continue priming the economy with interest rates of near zero percent.
