Economy's rebound not as strong as first thought

By JEANNINE AVERSA

posted: 30 MINUTES AGO

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WASHINGTON -The economy is growing modestly, with consumers too wary about spending to invigorate the recovery.

That was the picture that emerged Tuesday from reports on the nation's economy and the confidence of consumers, who power 70 percent of it. The economy grew at a 2.8 percent rate last quarter — less than originally estimated. And forecasts for the current quarter are for similarly slight growth before a drop-off next year.

The main reasons are that consumers remain reluctant to spend, commercial construction has slipped and imports are dampening U.S. growth.

The Commerce Department's new reading on gross domestic product was weaker than the 3.5 percent growth rate for the July-September period estimated just a month ago. The GDP, which measures the value of all goods and services produced in the United States, also was a tad weaker than the 2.9 percent growth rate that economists surveyed by Thomson Reuters had expected.

At the same time, the Conference Board's latest survey of consumer confidence found that as retailers enter the crucial holiday season, shoppers remain gloomy. Unemployment and tight credit have sapped consumers' willingness and ability to spend freely.

Also Tuesday, the Standard & Poor's/Case-Shiller home price index of 20 major cities suggested that the housing market's recovery is continuing, if only gradually. Home prices rose slightly in September. Compared with a year earlier, though, they remain down 9.4 percent.

The lackluster reading on economic growth and consumer confidence caused stocks to retreat from their 13-month highs. The Dow Jones industrial and other stock averages were down slightly in late-morning trading.

The good news is that the economy finally started to grow again after a record four straight losing quarters. The bad news is that the rebound, now and in the months ahead, probably will be lethargic. The worst recession since the 1930s is very likely over, but the economy's return to good health will take time, Fed officials and economists say.

Growth probably won't be strong enough to quickly drive down the nation's unemployment rate, currently at 10.2 percent. Some analysts think it could climb as high as 11 percent by the middle of next year before making a slow descent. It could take at least four years for the unemployment rate to drop back down to more normal levels.

For the current quarter, some economists think economic growth will slow to around a 2.5 percent pace, though others say it could reach 3 percent if holiday sales turn out better than expected.

Most say they think the economy will weaken again next year, with growth at a pace of around 1 percent as the impact of the $787 billion stimulus package fades and consumers keep tightening their belts under the strain of high unemployment and hard-to-get credit.

At the same time, the stock market has risen sharply in recent months. A rally on Monday carried the Dow up 133 points to its highest point in just over a year.

In part, stocks have been powered by a weak dollar and low interest rates. Lower rates let companies and investors borrow cheaply. They also cause some to shift money out of cash and bonds and into investments that promise higher returns, such as stocks.

Stocks also have benefited from higher corporate profits. Companies have managed to squeeze out higher profits without the cost of higher production or payrolls. They've done so by boosting their workers' productivity and drawing down their existing stockpiles of goods.

Much of the economy's return to growth last quarter reflected federal support for spending on homes and cars.

But Tuesday's report shows that some of that spending was a bit less robust than initially thought.

Spending on homes and other residential projects soared at an annualized pace of 19.5 percent last quarter, a little slower than the 23.4 percent rate first estimated. Spending on big-ticket "durable" goods — including cars — jumped at a pace of 20.1 percent, down from 22.3 percent.

Even with the downward revisions, it was notable that such spending grew, after falling in the previous quarter.

In the third quarter, the popular Cash for Clunkers rebates and an $8,000 tax credit for first-time homebuyers juiced up sales of cars and homes. The clunkers program ended in August, but the tax credit has been extended and expanded beyond first-time buyers.

What's not clear is whether the recovery can continue after government supports are gone. If consumers clam up, the economy could tip back into recession.

Tuesday's report showed that overall consumer spending grew at a pace of 2.9 percent last quarter. That was down from a 3.4 percent growth rate first estimated, though it marked the best showing since early 2007.

On the business side, companies cut back spending on commercial construction — a weak spot in the economy — at 15.1 percent annualized pace. That was deeper than the 9 percent annualized cut back first estimated.

Businesses also trimmed stockpiles of goods by $133.4 billion last quarter, slightly more than initially estimated.

And the nation's trade deficit ended up shaving 0.83 percentage point off GDP last quarter, more than first thought.

Unlike past rebounds that were driven by the spending of everyday Americans, this one appears to hinge on spending by businesses, foreigners and — until it runs out — the government. And in an encouraging note, businesses after-tax profits grew at a 13.4 percent pace last quarter, up from a 0.9 percent pace in the prior period, Tuesday's report showed.

The government makes three estimates of economic activity for any given quarter. Each is based on more complete data. Tuesday's was the second reading of the third-quarter GDP data.

2009-11-24 11:59:13