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GDP Expanded 3.5% in 3rd Quarter
OCTOBER 29, 2009, 10:53 A.M. ET
The economy expanded in the third quarter after shrinking for four consecutive quarters, likely marking an end to the worst recession since World War II. But the recovery is expected to be slow, as the economy continues to fight rising unemployment and a persistent credit crunch.
Gross domestic product rose by a higher-than-expected seasonally adjusted 3.5% annual rate July through September, the Commerce Department said Thursday in its first estimate of third-quarter GDP.
Economists surveyed by Dow Jones Newswires had forecast 3.2% GDP growth during the summer. GDP is the broad measure of economic activity in the U.S.
The rise in GDP was the first since the second quarter of 2008. It served as an unofficial confirmation that the longest and deepest recession since the Great Depression has ended. The purveyor of the official word on recessions, the National Bureau of Economic Research, declared the slump began in December 2007. The private, non-profit research group has yet to announce an ending date.
The GDP gain was driven by consumer spending, which rose by 3.4% in the third quarter, compared with a 0.9% drop in the April-to-June period. Consumer spending contributed 2.36 percentange points to GDP growth.
Economists said the massive stimulus injected by the U.S. government, such as the cash for clunkers program that lifted car sales, helped boost consumer spending. Since the federal stimulus reached its maximum effect in the third quarter and the unemployment rate remains high, there's uncertainty over the sustainability of the recovery.
Price gauges showed the core inflation rate -- which strips out volatile food and energy prices and is closely watched by the Federal Reserve -- slid to 1.4% from 2.0% in the second quarter, in a sign that price pressures remain subdued.
Federal Reserve Vice Chairman Donald Kohn cautioned as recently as October 13 that he expects the economic recovery to be subdued, with sluggish growth keeping inflation under wraps.
Economists are debating when the economy will be strong enough for the central bank to start raising interest rates from their current level near zero.
The Fed's rate-setting policy meets November 3-4 and is widely expected to leave rates unchanged at record lows, but some observers say it may hint at increases to come.
"With the jobless rate near 10% and the risk of adverse market reaction, now is not the time" to change the Fed language that rates will stay close to zero for an extended period of time, said Michael Ferolli, economist at J.P. Morgan Chase, ahead of the GDP release.
While the economy has resumed rising, joblessness is still high. Next week the government will release data that could show U.S. unemployment topped 10% during October. Faced with bleak job prospects, U.S. consumers are losing faith, a report this week indicated.
The Conference Board, a private research group, said its index of consumer confidence fell to 47.7 this month, from 53.4 in September. The percentage of those who think jobs are hard to get rose. Their pessimism of future earnings could restrain holiday spending.
U.S. business inventories added 0.94 percentage point to GDP, the Commerce Department said Thursday. Inventories decreased $130.8 billion, compared to $160.2 billion in the second quarter.
Another component of GDP, housing, saw its first increase since the last quarter of 2005. Residential fixed investment surged by 23.4%, the largest rise since 1986.
Federal government spending increased 7.9%, after rising 11.4% in the second quarter. State and local government outlays fell 1.1%, after going up by 3.9% in the second quarter.
Real final sales of domestic product, which is GDP less the change in private inventories, increased at a 2.5% annual rate in the third quarter. Second-quarter real final sales of domestic product rose by 0.7%.
International trade weighed slightly on GDP. U.S. exports rose by 14.7%, while imports increased 16.4%.
Business spending reduced GDP by 0.24 percentage points. It fell by 2.5% in the third quarter, the best performance since a mild increase in the second quarter of 2008.
Price inflation gauges remained contained in the third quarter. The price index for personal consumption expenditures rose by 2.8% after increasing 1.4% in the second quarter.
Other price inflation gauges in the report include the price index for gross domestic purchases, which measures prices paid by U.S. residents. It rose by 1.6%, after increasing 0.5% in the second quarter. The chain-weighted GDP price index increased 0.8%, after remaining flat in the second quarter.
The number of U.S. workers filing new claims for jobless benefits fell slightly last week, the U.S. Labor Department said in its weekly report Thursday.
Total claims lasting more than one week, meanwhile, also decreased.
Initial claims for jobless benefits declined by 1,000 to 530,000 in the week ended Oct. 24. The previous week's level was unrevised at 531,000.
Economists surveyed by Dow Jones Newswires had expected a larger decrease of 6,000 claims.
The four-week moving average of new claims, which aims to smooth volatility in the data, fell by 6,000 to 526,250 from the previous week's unrevised figure of 532,250. That is the lowest level since Jan. 10.
Claims still remain at a fairly high level, suggesting the job market has a long recovery ahead. Nevertheless, economists still see some positive signs in the data.
"Jobless claims remain on a downward trend, a development that is consistent with moderating employment losses," economists at J.P. Morgan Chase & Co. wrote in a memo last week. "Continuing jobless claims are also falling, while total jobless claims, including emergency and extended benefits, look to be leveling off."
In the Labor Department's Thursday report, the number of continuing claims -- those drawn by workers for more than one week in the week ended Oct. 17 -- declined by 148,000 to 5,797,000 from the preceding week's revised level of 5,945,000.
The unemployment rate for workers with unemployment insurance for the week ended Oct. 17 was 4.4%-- a decrease of a 0.1 percentage point from the prior week's unrevised rate of 4.5%.
The largest increase in initial claims for the week ending Oct. 17 was in California due to layoffs in the construction, agriculture, trade and service industry sectors. The largest decrease in initial claims occurred in Wisconsin.