Economic growth spikes to 3.5% in 3Q

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By Patrice Hill

UPDATED:

Economic growth came roaring back in the summer quarter, registering at a 3.5 percent pace and raising hopes that the economy is entering a recovery after the longest recession since World War II, the Commerce Department reported Thursday morning.

Growth was the strongest in two years and largely reflected the impact from two popular government programs -- the "cash for clunkers" auto trade-in program and a housing tax credit for first-time home buyers.

Purchases of big-ticket items -- mostly cars and household goods such as appliances -- surged at a 22.3 percent rate as consumers flocked to auto dealerships to unload their gas-guzzling cars. The department said the ramping up of auto production to meet demand for new fuel-efficient cars under the clunkers program accounted for nearly half, or 1.66 percentage points, of the growth during the quarter.

Housing construction soared at a 23.4 percent rate after having plummeted by 23.3 percent in the spring as builders broke ground on new homes in hopes of serving buyers taking advantage of the $8,000 home buyers' credit.

The three-year-long housing slump led to the recession in December 2007, and economists hope the revival in housing that began this summer will lead the economy back into a lasting recovery.

The exuberance during the July-September quarter extended to businesses, which increased spending on equipment and software for the first time in the recession at a 1.1 percent rate. Businesses also slowed the intense liquidation of inventories that depleted growth earlier this year, helping to bolster growth in the quarter.

While the auto and housing programs provided a powerful impetus to the economy during the summer, the effect of other government stimulus provisions appeared to tail off after a spurt in the spring.

Federal spending increased by 7.9 percent after surging by 11.4 percent in the spring, while state and local spending fell by 1.1 percent after increasing by 3.9 percent right after the stimulus funds were released by the federal government.

Signs also have emerged in recent weeks that the big push the economy got from the housing and auto programs is now fizzling, possibly endangering growth in future quarters. After Congress allowed the clunkers program to expire a month ago, auto sales cratered by 35 percent, while Congress has not passed bills that would extend the housing credit.

"We have clearly begun to emerge from the trough," said Bart Van Ark, chief economist at the Conference Board. "But there's still a long way to go, and we still don't know enough about the sustainability of these recovery signals. The comparatively good news is largely driven by temporary factors."

After a one-quarter spike in consumer spending driven by the auto program, "consumer spending will fall flat during the holiday season" as consumers continue to rebuild their depleted savings, he said. And the modest recovery in business spending on equipment likely will be overwhelmed by plummeting spending on commercial real estate, he said.

Like many economists, Mr. Van Ark predicted that growth could fall back to only 1 percent in coming quarters. Some economists warn of the danger of a "double-dip" recession once the artificial stimulus is removed from the economy.