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What Will The Recovery Hold?

Fri, 10/30/2009 - 5:23am
Jeannine Aversa, AP Economics Writer

WASHINGTON (AP) -- After a record four straight losing quarters, the economy finally grew again. It was hardly a boom, and it was almost all because of government spending. But it was enough to change the question from when the recession will end to whether the recovery will hold.

Unlike past rebounds that were driven by the spending of everyday Americans, this one appears to hinge on spending by businesses, foreigners and -- until it runs out -- the government.

Helped in large part by federal support for spending on cars and homes, the economy grew at an annual rate of 3.5 percent from July through September, the government said Thursday.

It was the first time the economy grew at all since the spring of 2008, and one economist, Brian Bethune of IHS Global Insight, estimated it would have been more like an anemic 1 percent without the popular Cash for Clunkers rebates and an $8,000 tax credit for first-time homebuyers.

But the government help is only temporary, and without it, consumer spending is likely to weaken. If shoppers clam up as credit stays tight and jobs remain scarce, the economy could tip back into recession.

President Barack Obama called the report "welcome news," but acknowledged that "we have a long way to go to fully restore our economy" and recover from the deepest and longest slump since the 1930s-era Great Depression.

The return of economic growth puts the White House in a delicate position: The president wants to take credit for ending the recession, but unemployment is still causing pain and anxiety throughout the country.

Millions have yet to feel a benefit from the recovery in the form of a new job or even an easier time getting a simple loan. Even those with jobs are reluctant to go on a spending spree. The values of their homes and 401(k)s remain shrunken.

"The benchmark I use to measure the strength of our economy is not just whether our GDP is growing, but whether we are creating jobs, whether families are having an easier time paying their bills, whether our businesses are hiring and doing well," Obama said.

The rebound ended the record streak of four straight quarters of economic contraction and gave the stock market its best day in months. The Dow Jones industrial average gained nearly 200 points.

Whether the recovery can continue after the government supports are gone is unclear. Economists predict growth will be slower as the benefit of the $787 billion stimulus package fades.

And next year could be even slower than that. A rising number of analysts say the economy will grow at a 1 percent rate in the first quarter -- perhaps more if Congress extends the tax credit for homebuyers.

Christina Romer, Obama's chief economist, has acknowledged that the government's stimulus spending has already delivered its biggest economic jolt.

Federal government spending rose at a rate of 7.9 percent in the third quarter, on top of an 11.4 percent rate in the second quarter. And businesses increased spending on equipment and software at a 1.1 percent pace, the first increase in nearly two years.

For now, the economy will have to keep counting on businesses replenishing their depleted stockpiles and replacing outdated equipment.

"A good part of the demand we're seeing is because companies have to reorder to replenish inventories," said Herb Goetschius, president of McNichols Co., a Florida maker of metal gratings and other products. "Because they can't build new plants right now, they are spending more on repairs and maintenance."

Businesses that slashed their stockpiles of goods in the second quarter cut them more slowly from July to September. Now that inventories are at rock-bottom levels, even the smallest increase in demand will probably lead factories to produce more.

Helped by a cheaper dollar, exports of U.S.-made goods to foreign customers should help support the recovery, analysts said -- particularly as economies improve in Asia and Europe. A modest recovery in U.S. housing will likely contribute, too.

"Those will be the driving forces of this recovery," said economist Ken Mayland of ClearView Economics. "I think this is one recovery that is going to probably be the least dependent on consumers."

In 1980, businesses led an economic recovery. It quickly fizzled, and the economy fell into a severe recession in 1981 and 1982. The unemployment rate climbed to 10.8 percent, the post-World War II high. Today, it stands at 9.8 percent.

For now, economists say the risks are low that the economy will suffer a so-called double-dip recession. They hope businesses will spend enough to sustain the recovery. But the possibility can't be dismissed.

By itself, growth in a quarter doesn't mean a recession has ended. For example, this recession began in December 2007, according to the panel of academics in charge of declaring the beginnings and ends of downturns -- even though the economy grew that quarter.

"Even if we've turned the corner, we know it's a long way before we're completely recovered," Romer, chair of the White House Council of Economic Advisers, said in an interview with The Associated Press. "You can't have an unemployment rate of 9.8 percent and not be deeply troubled."

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