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GDP report: Economy grows after a year of contraction

US economy grew 3.5 percent in the third quarter, according to GDP report. But it will be months before the economy adds jobs, economists forecast.

By Staff writer / October 29, 2009

Men wait outside the Staffing Network in southwest Detroit, Oct. 21. The Labor Department said Wednesday Michigan reported the nation's highest unemployment rate at 15.3 percent.

Carlos Osorio/AP

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The US economy has begun to grow again, but forecasters say it will be months before this translates into growth where it counts most – in the number of jobs.

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America's gross domestic product rose in the third quarter at a 3.5 percent annual rate, the Commerce Department reported Thursday. That solid pace follows four straight quarters of decline in GDP – the longest sustained contraction in 62 years of record-keeping. By most accounts, the recession that began in December 2007 is over.

But what comes next?

Many economists say consumer spending is starting to regain its footing, meaning that growth will be sustainable and not dependent merely on the massive fiscal stimulus enacted this year by the Obama administration. But they say the rebound could be slow, producing only tepid job creation.

"The recovery in output continues to be unaccompanied by a recovery in jobs," economists at IHS Global Insight said in a forecast this month. "We ... expect that firms will have to re-hire sooner after this recession than after the 2001 one. But we still do not expect to see private employment turn decisively higher until the second half of 2010."

In fact, Global Insight predicts that GDP growth will be cooler in the fourth quarter (a 2.6 percent growth rate) and first quarter of next year (1.8 percent growth) than it was this summer.

Similarly, economist Paul Kasriel at the Northern Trust Co. predicts that a full year will go by before the US sees another quarter with growth topping 3 percent.

In a survey released Monday by the National Association for Business Economics, some forecasters were more optimistic, expecting growth above 3 percent for the 2010 calendar year. None expected GDP to grow by more than 4 percent.

The strength of the recovery will depend in part on the ability of Americans to manage the record level of debt that built up before the recession. Banks remain weak, as they work through a tide of bad loans. Many consumers and small businesses either can't borrow (because of tightening credit terms) or don't want to borrow.

Still, a turnaround in consumer spending has begun.

A jump in personal spending last quarter was fueled partly by federal programs aimed at automobile sales ("cash for clunkers") and the housing market (a tax credit for first-time home buyers). But recent retail sales numbers show gains on virtually all fronts, from home furnishings to clothing to groceries, says economist Bernard Baumohl of the Economic Outlook Group. The key reason: improved confidence among the 90 percent of workers who do have jobs. Such spending typically helps launch a turnaround before the unemployment rate begins to decline.

In recent months, the economy has been losing fewer jobs than at the beginning of the year. That suggests that job growth could turn modestly positive in the new year. But 9.8 percent of the labor force is unemployed, as of last month, after a loss of 7 million jobs during the recession.

The third-quarter GDP number released Thursday is preliminary. A more precise figure will come out in a month.

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What will it take to bring back 7 million jobs?

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