Economic recovery likely not quite that energetic

[November 24, 2009]  WASHINGTON (AP) -- Remember the economy's return to growth last quarter? Well, it probably wasn't as energetic as first thought.

A government report due out Tuesday morning is expected to show that the economy expanded at a pace of 2.9 percent from July through September, according to Wall Street economists surveyed by Thomson Reuters. If they are right, it would mark a slower expansion than the 3.5 percent pace reported a month ago. Most of that rebound reflected federal support for spending on homes and cars.

The main forces behind the expected third-quarter downgrade: commercial construction was weaker, the nation's trade gap was more of a drag, businesses trimmed more of their stockpiles and consumers didn't spend as much.

So, the good news is the economy finally started to grow again, after a record four straight losing quarters. The bad news: The rebound, now and in the months ahead, probably will be lethargic.

Federal Reserve officials and other economists say growth won't be strong enough to quickly drive down the nation's unemployment rate. The nation's current 10.2 percent jobless rate marks only the second time in the post-World War II period that unemployment has topped 10 percent.

"It's a half-speed recovery," said Stuart Hoffman, chief economist at PNC Financial Services Group. "We're in the slow lane."

Some economists think growth will slow to around a 2.5 percent pace in the current quarter, although a few say it could clock in at about 3 percent if holiday sales come in better than expected.

Most say they think the economy will weaken again next year, with growth at a pace of around 1 percent as the impact of the $787 billion stimulus package fades and consumers keep tightening their belts under the strain of high unemployment and hard-to-get credit.

In the third quarter, the popular Cash for Clunkers rebates and an $8,000 tax credit for first-time homebuyers juiced up sales of cars and homes. The clunkers program is over now, but the tax credit has been extended and expanded beyond first-time buyers.

What's not clear is whether the recovery can continue after government supports are gone.

If consumers clam up, the economy could tip back into recession. President Barack Obama recently cautioned that the economy could suffer a "double dip" downturn.

Fed Chairman Ben Bernanke, however, says he doesn't think that will happen. But last week the Fed chief did warn the recovery faces "important headwinds," such as tight credit and a weak job market that will make consumers cautious in their spending.

Those factors "likely will prevent the expansion from being as robust as we would hope," Bernanke said.

The government takes three cracks at estimating economic activity for any given quarter. Each estimate is based on more complete data. Tuesday's will be the second reading of the third-quarter GDP data.

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.

Some economists think the jobless rate could climb as high as 11 percent by the middle of next year before making a slow descent. It could take at least four years for the unemployment rate to drop back down to more normal levels.

"The best thing we can say about the labor market right now is that it may be getting worse more slowly," Bernanke said last week.

Against that backdrop, Obama said he's weighing tax breaks that could encourage businesses to hire again.

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.

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.

[Associated Press; By JEANNINE AVERSA]

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