MercoPress. South Atlantic News Agency

US expands slower than expected but fourth quarter should see 4% growth

Economist Martin Neil Baily at the Brookings Institution

The latest economic data shows the US economy grew more slowly than first thought. US Commerce Department reports that GDP expanded at a 2.2% annual rate from July to September, down from an earlier estimate of 2.8%.

Despite the downgrade, other indicators suggest a strong showing in the fourth quarter. But some economists say an economic turnaround is not a sure thing.

The Commerce Department says the sum of all goods and services produced in the US between July and September was lower than initial estimates because consumers did not spend as much, commercial construction was weaker and companies reduced their inventories.

Even so, the final GDP numbers signal a return to growth after four straight quarters of decline. Wall Street reacted positively, sending key indexes sharply higher - buoyed in part by a nearly 7.5% jump in sales of existing homes.

The National Association of Realtors said sales rose to an annual rate of 6.5 million - the highest level in more than two years.

“This clearly is a rush of first-time buyers not wanting to miss out on the tax credit, but there are many more potential buyers who can enter the market in the months ahead,” said the National Association of Realtors' chief economist Lawrence Yun.

The original deadline for the US government's tax credits was 30 November. It was later extended.

Mr Yun said: “We expect a temporary sales drop while buying activity ramps up for another surge in the spring when buyers take advantage of the expanded tax credit, which hopefully will take us into a self-sustaining market in the second half of 2010.”

The report pushed stocks on Wall Street higher as the markets closed on Tuesday. The Dow Jones industrial average rose 50 points, and both the Standard & Poor's 500 and the Nasdaq indexes closed at new highs for the year.

Economist Martin Neil Baily at the Brookings Institution says the latest indicators suggest the economy is on pace to beat third quarter results. “Most forecasters are looking at more than that in the fourth quarter, maybe 4% GDP growth or a little more than that. So given that the economy is turning around, it sort of looks good,” he said.

The downside is that much of the growth in the third quarter was fueled by government stimulus spending. That includes the “Cash for Clunkers” rebates and the $8,000 tax credit for first time homebuyers.

As government programs unwind, so could the recovery. “Some of those forecasters see strong growth in 2010 and 2011. But I think that's far from a sure thing. I think it's quite possible that what we're seeing now is a kind of bounce back with inventories and so on and that you may not get a continuation of strong growth in 2010 and 2011,” Baily said.

He admits economic forecasting is not a perfect science. He says the worst case scenario would be a period of growth, followed by stagnation and then another recession. “Unemployment is still very high: consumers have lost a lot of wealth. They're uncertain about their own employment situation. If they lose a job, it's very hard to get another job, so there are a lot of scary things out there in the economy,” he said.

Despite the warning, analysts say the economy has bounced back faster than expected.

A survey of leading economists predicts the US economy will grow 4% between October and December.

The US government releases its first estimate of fourth quarter activity on January 29.