Economy grows at 3.5%

WASHINGTON — The painful recession that gripped the U.S. economy the past two years appears to be over, as the economy grew at a healthy 3.5 percent annual rate from July through September and seems on track to maintain steady if somewhat subdued growth.

Even so, analysts warned that the road ahead remains fraught with challenge, as excessive debt and high unemployment still burden the economy.

Growth was powered in the third quarter by rising exports, business investment, personal consumption and government-sparked sales of homes and autos, the Commerce Department reported Thursday. The positive numbers followed four consecutive negative quarters, the first time that's happened since 1947.

"We've come a long way since the first three months of 2009, when our economy shrunk by an alarming 6.4 percent. In fact, the 3.5 percent growth in the third quarter is the largest three-month gain we have seen in two years," President Obama said. "This is obviously welcome news, and an affirmation that this recession is abating and the steps we've taken have made a difference."

Thursday's report coincided with the 80th anniversary of the 1929 stock market crash, and helped end a four-day skid on the New York Stock Exchange. The Dow Jones Industrial Average closed up 199.89 points to 9,962.58, a 2.05 percent rise. The S&P 500 finished up 23.48 points to 1,066.11, a 2.25 percent jump, and the Nasdaq rose by 37.94 points to 2,097.55, a 1.84 percent increase.

The economy had shrunk at a 6.4 percent annual rate in the first quarter of this year and at a 0.7 percent rate in the second quarter, so third-quarter growth signals positive momentum.

"The 2009 third-quarter GDP numbers are proof that the great recession is over and a recovery has begun. Consumer spending, housing, business equipment investment, exports and federal government spending are adding to growth," said Mark Zandi, the chief economist for forecaster Moody's "However, most of the growth was driven by (federal) stimulus."

The government's Cash for Clunkers program to boost auto sales, he said, accounted for about half of the third-quarter growth in the gross domestic product, the broadest measure of value of U.S. goods and services produced. The Bureau of Economic Analysis, which prepared the preliminary growth estimates, said motor vehicle sales added 1.66 percentage points to third-quarter growth.

Housing, a drag on the economy since the recession began in December 2007, also turned positive in the third quarter, partly because of the $8,000 federal tax credit for first-time homebuyers and government efforts to reduce mortgage rates.

Still, some economists fear a slowdown is coming.

"We expect a growth relapse in the next few quarters, though not into negative territory. However, by the second half of next year we predict that growth will pick up as businesses and consumers feel more confident that recovery is here to stay," Nariman Behravesh, the chief economist for forecaster IHS Global Insight, said in a research note that projected a 2 percent annualized growth rate well into next year.

Some forecasters warn of a possible dip back into recession.

"For the sake of long-term economic health, Americans needed to clear the inventory of unsold homes and pay down auto debt by staying in their old cars longer. That did not happen. Instead we just got back on the merry-go-round," Peter Schiff, the president of Euro Pacific Capital, said in a research note. "The result will be that we have simply pushed the recession into the future."

A sharp slowdown seems unlikely to Christina Romer, the head of the White House Council of Economic Advisers. Just as the economy's sharp contraction fueled a vicious circle, government-sparked growth should spark a virtuous one, she said.

"Thank God it's fueled by the stimulus package," Romer told a small group of economic reporters, stressing that the whole notion of stimulus was for the government to spark the private sector into restoring investment and expansion.

Still, Romer acknowledged that it's likely to be another half-year before employers begin hiring in earnest. The unemployment rate, now 9.8 percent, is likely to remain above 9 percent through next year, she said, if blue chip forecasters are right and the economy settles into a growth pattern of a 2.5 to 3 percent annual rate.

The economy needs to grow faster than 4 percent annually to reduce the unemployment rate, analysts say, in part because new entrants steadily swell the labor force.

Beyond the numbers, Romer suggested that psychological hurdles must be cleared before the economy settles into a confident expansion, because Americans are still recovering from the turmoil of the past two years.

"It is just really striking how wretched 2008 was. The kind of shock this economy faced in terms of the decline of wealth, the rise in stock market volatility, the spike in credit spreads — it was really cataclysmic," she said. "When you've faced a tremendous shock, it takes you awhile to get your confidence back, and I think that's what we're seeing in industry, what we're seeing in consumers."