WASHINGTON — The 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 that the economy will end the year on stronger footing.
The Commerce Department’s new reading on gross domestic product for the July-to-September quarter was weaker than the 2.8 percent growth rate estimated a month ago. Economists had predicted that that figure would remain the same in the final estimate of the quarter’s gross domestic product - 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.
“We are really starting to see the mechanisms for a sustained recovery come into place,” said Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh. “We are starting to see investment numbers come back.”
Many analysts still think the economy is on track for a better finish in the current quarter. One sign was a separate report Tuesday that home resales surged last month to their highest level in nearly three years, thanks to an extraordinary level of federal support. The report added to evidence that the housing market, which led the country into recession, is on the mend.
That gave a boost to stocks on Wall Street. The Dow Jones industrial average gained nearly 51 points, or about 0.5 percent. Broader stock averages also rose.
The economy is probably growing at nearly 4 percent in the October-to-December quarter, analysts said. 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 cut 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 that growth will slow to a pace of 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. Arkansas’ unemployment rate in November was 7.4 percent.
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.
Much of the third quarter’s growth was supported by government stimulus spending. The “cash for clunkers” rebates and a tax credit for first-time homebuyers buoyed sales of cars and houses. The clunkers program ended in August, though the tax credit has been extended and expanded beyond first-time buyers.
The government makes three estimates of the gross domestic product each quarter. Each estimate is based on more complete data. The government’s initial estimate for the third quarter was more energetic, showing the economy’s growth at a 3.5 percent pace. But subsequent estimates showed the recovery was actually slower.
Tuesday’s report showed that consumer spending grewat a 2.8 percent pace. That was slightly weaker than the 2.9 percent pace previously estimated and was one of the factors behind the lower overall reading.
Homebuyers in November were racing to complete their sales before the original expiration date of a tax credit for first-time buyers that was scheduled to expire Nov. 30. Last month, Congress decided to extend and expand the credit to ensure that the housing market could sustain its recovery.
“Things are stabilizing,” said Pete Flint, chief executive of real estate Web site Trulia.com. “There is a significant amount of buyer interest out there.”
About 2 million homebuyers have taken advantage of the credit so far, the National Association of Realtors said Tuesday.
“The tax credit had the intended impact of drawing buyers in and lowering inventory,” Lawrence Yun, chief economist for the Realtors group, said at a news conference.
The Realtors group forecasts that another 2.4 million homebuyers will use the credit by the middle of next year. First-time buyers made up about half of all transactions last month, driving sales up 44 percent above last year’s levels, a record jump.
“In the short run, it’s an effective stimulus,” said John Ryding, chief economist at RDQ Economics. “If you give someone money to spend on something, they will spend it.”
November’s sales rose 7.4 percent to a seasonally adjusted annual rate of 6.54 million, from a downwardly revised pace of 6.09 million in October, the Realtors group said.It was the highest level since February 2007. Sales had been expected to rise to an annual pace of 6.25 million, according to economists surveyed by Thomson Reuters.
Sales are now up 46 percent from the bottom in January, but down 10 percent from the peak more than four years ago. The inventory of unsold houses on the market fell about 1 percent to 3.5 million. That’s a healthy 6.5 month supply at the current sales pace, the lowest level in three years.
The median sales price was $172,600, down 4.3 percent from a year earlier, and up 0.2 percent from October. Information for this article was contributed by Jeannine Aversa and Alan Zibel of The Associated Press; and Bob Willis and Timothy R. Homan of Bloomberg News.
Front Section, Pages 1 on 12/23/2009