Economy grows, recovery fragile

WASHINGTON (AP) — Fueled by government stimulus, the economy grew last quarter for the first time in more than a year. The question now is, can the recovery last?

Federal support for spending on cars and homes drove the economy up 3.5 percent from July through September. But the government aid — from tax credits for home buyers to rebates for auto purchases — is only temporary. Consumer spending, which normally drives recoveries, is likely to weaken without it.

If shoppers retrench in the face of rising joblessness and tight credit, the fragile recovery could tip back into recession.

Wall Street welcomed the positive news from the third quarter.

The Dow Jones industrial average jumped 200 points Thursday to recoup most of its losses for the week, while demand for safe-haven holdings such as Treasurys wilted.

For the Obama administration, the positive report on economic growth is a delicate one: It wants to take credit for ending the recession. On the other hand, it needs to acknowledge that rising joblessness continues to cause pain throughout the country.

Millions of Americans have yet to feel a real-world benefit from the recovery in the form of job creation or an easier time getting a loan. Even those with jobs are reluctant to spend. The values of their homes and 401(k)s remain shrunken.

President Barack Obama called the report “welcome news” in remarks prepared for a small-business group but acknowledged that “we have a long way to go to fully restore our economy” and recover from the deepest business slump since the 1930s-era Great Depression.

“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 reported Thursday by the Commerce Department ended the record streak of four-straight quarters of contracting economic activity.

But whether the recovery can continue after government supports are gone is unclear. Many economists predict economic activity won’t grow as much in the months ahead as the bracing impact of the government’s $787 billion package of increased government spending and tax cuts fades.

The National Association for Business Economics thinks growth will slow to a 2.4 percent pace in the current October-December quarter. It expects a 2.5 percent growth rate in the first three months of next year, although other economists believe the pace will be closer to 1 percent.

Christina Romer, Obama’s chief economist, has acknowledged that the government’s stimulus spending already had its biggest impact and probably won’t contribute to significant growth next year.

For the third quarter, government support proved crucial. Armed with cash from government support programs, consumers led the rebound in the third quarter, snapping up cars and homes. A jump in spending on big-ticket manufactured goods largely reflected car purchases spurred by the government’s Cash for Clunkers program.

Spending on housing last quarter was positive for the first time since the end of 2005. The government’s $8,000 tax credit for first-time home buyers supported the housing rebound. Congress is considering extending the credit, which expires Nov. 30.

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