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US Economic Recovery Not as Strong as Previous Estimates

US Economic Recovery Not as Strong as Previous Estimates
US Economic Recovery Not as Strong as Previous Estimates

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New economic data shows the U.S. economy grew more slowly than first thought.  The US Commerce Department reports the nation's gross domestic product (GDP) expanded at a 2.2 percent annual rate from July to September, down from an earlier estimate of 2.8 percent.  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 U.S. 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 percent jump in sales of existing homes.
 
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 four percent [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 U.S. economy will grow four percent between October and December.

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

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