Economy grew at 2.2 percent pace in 3Q

UPDATED:

The U.S. economy grew at a 2.2 percent pace in the third quarter, as the recovery got off to a weaker start than previously thought. But all signs suggest the economy will end the year on stronger footing.

The Commerce Department’s new reading on the gross domestic product for the July-to-September quarter was slower than the 2.8 percent growth rate estimated a month ago. Economists had predicted this figure would remain the same in the final estimate of the quarter’s GDP — the value of all goods and services produced in the United States.

The main factors behind the downgrade were that consumers didn’t spend as much, commercial construction was weaker, business investment in equipment and software was softer, and companies cut back more on their stockpiles of goods.

Even so, the economy managed to return to growth during the quarter after a record four straight quarters of decline. That signaled that the deepest and longest recession since the 1930s had ended and the economy had entered a new fragile phase of recovery.

Another positive economic sign emerged Tuesday: Sales of previously owned homes rocketed to the highest level in nearly three years, fueled by federal aid. It added to evidence that the housing market, which led the country into recession, is on the mend.

Despite the lower GDP reading, many analysts still think the economy is on track for a better finish in the current quarter.

The economy is probably growing at nearly 4 percent in the October-to-December quarter, analysts say. A few peg it closer to 5 percent. If they’re right, that would mark the strongest showing since 5.4 percent growth in the first quarter of 2006 — well before the recession began. The government will release its first estimate of fourth-quarter economic activity on Jan. 29.

Growth in the final quarter is expected to be driven mainly by companies restocking depleted inventories. Stocks of goods were slashed at a record pace during the recession, so even the smallest pickup in customer demand will force factories to step up production and boost overall economic activity in the final quarter.

Stronger sales of exports to foreign customers, as well as spending by U.S. consumers and businesses, also will help underpin fourth-quarter growth.

“We expect a better performance in the fourth quarter, but the core problems for the economy — bust banks and a massively overleveraged consumer — have not gone away,” said Ian Shepherdson, chief economist at High Frequency Economics.

That’s why many economists predict growth will slow to a pace of around 2 percent or 3 percent in the first three months of 2010. Consumers are likely to stay frugal, and the big lift from inventory restocking isn’t expected to last.

With unemployment high and credit tight, growth won’t likely be as energetic as in the early phases of previous recoveries. The unemployment rate, now at 10 percent, is expected to remain high.

The economy has been on a wild ride this year. In the first three months, it shrank at a pace of 6.4 percent — its worst slide in 27 years. The recession eased in the second quarter, with the economy dipping at a pace of just 0.7 percent. The economy returned to growth in the third quarter.

But much of the third quarter’s growth was supported by government stimulus spending. The “Cash for Clunkers” auto-buying rebates and a tax credit for first-time home buyers buoyed sales of cars and homes. The clunkers program ended in August, though the tax credit has been extended and expanded beyond first-time buyers.

Story Continues →