Recession over: US economy growing again

The US economy is growing again, bringing to an end the sharpest contraction since the Great Depression of the 1930s and sparking a rally on the stock market when the figures were confirmed yesterday.

Gross domestic product (GDP) grew at a better-than-expected annualised rate of 3.5 per cent in the third quarter as consumer spending and construction rebounded, driven by government programmes such as the scrappage scheme for new car buyers and a tax break for people buying new homes.

The return to growth comes after four successive quarters of shrinking economic activity, including a violent 6.4 per cent contraction in the first three months of this year, as the fall-out from the 2008 financial panic was at its worst.

There were also encouraging signs from the jobs market yesterday: the number of new unemployment benefit claimants fell by 1,000 last week, and the number of people on continuing benefits fell to 5.8 million, its lowest level in seven months.

President Barack Obama hailed the figures as "affirmation that this recession is abating", while the head of his team of economic advisers, Christina Romer, said the $787bn economic stimulus package agreed in February was a major contributing factor.

"While the turnaround in GDP is a necessary first step, we need to keep it going so we do finally see us adding jobs again and the unemployment rate finally coming down," said Romer.

Last night, the White House was pressing for the extension of a scheme that gives an $8,000 tax credit to first-time home buyers, which is before Congress.

Economists noted that the GDP numbers were inflated by government initiatives, and debated whether the underlying economy was yet healthy enough to stand on its own two feet.

Bart van Ark, chief economist of the Conference Board, said: "There is still a long way to go and we still don't know enough about the sustainability of these recovery signals. The comparatively good Q3 news is largely driven by temporary factors.

Consumer spending will fall flat during the holiday season, and exports will recover more slowly than in Q3. Any modest up-tick in investments in equipment and software will most likely be offset by continued declines in commercial real estate."

Ian Morris, the chief US economist at HSBC in New York, said a lot would hinge on whether Americans decided that, after years of running up credit cards debts and using the equity in the homes as collateral for loans, they must start saving heavily.

"We're not pretending everything is wonderful," Mr Morris said. "Real, personal disposable income fell 3.4 per cent in Q3, so with income down and consumption up, the saving ratio fell back to 3.3 per cent in Q3.

"Bears argue the saving ratio needs to climb to 8 to 10 per cent in response to wealth losses, but remember that policymakers are trying to make sure that does not happen in the short-run, something they apparently are having some success in doing.

And with stock and house prices on the way up, the urgency for an immediate sharp rise in the saving ratio is no longer quite as urgent as it was early this year."

Stock markets rallied in response to the better-than-expected growth. At noon, the Dow Jones average was up 166 points, 1.7 per cent. In London, the FTSE 100 reversed its losses and closed 57.3 points higher at 5,137.72.

A recession is typically defined as two successive quarters of negative growth, but the formal arbiter of whether the US economy is in recession is the independent National Bureau of Economic Research, which takes into account other factors, including unemployment. The national unemployment rate is forecast to have risen to 9.9 per cent in October.

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