U.S. economy starts to grow

But sustainability still a question

Last Updated: Tuesday, November 24, 2009 | 5:40 PM ET

CBC News

The U.S. economy grew 2.8 per cent in the three months ended in September, the Commerce Department reported Tuesday.

That was a revision from the government's earlier estimate that the gross domestic product —the value of all goods and services produced in the U.S.— grew by 3.5 per cent.

U.S. economic growth is still not expected to be strong enough to drive down high unemployment rates. (Paul Sakuma/Associated Press)

The report shows the economy grew for the first time after a record four quarters of contraction.

But economists and officials with the U.S. Federal Reserve say growth is not expected to be strong enough to drive down unemployment quickly. It's now at 10.2 per cent, only the second time since the Second World War that the American jobless rate has risen above 10 per cent.

Much of the growth reflected massive government stimulus to encourage spending on homes and cars.

Spending on homes and other residential projects soared at an annualized pace of 19.5 per cent last quarter. Sales of durable goods — such as large appliances and cars — rose 20.1 per cent.

Overall consumer spending, a major part of the economy, grew 2.9 per cent last quarter.

Unclear what happens after stimulus stops

Whether that will continue after the government spending abates isn't clear.

U.S. President Barack Obama recently warned that the economy could suffer a "double dip" and return to contraction. The chairman of the Federal Reserve, Ben Bernanke, has said he doesn't think that will happen. But last week, Bernanke warned the recovery was threatened by "important headwinds," such as tight credit and a weak job market that will make consumers cautious in their spending.

The GDP report showed companies cut back spending on commercial construction by 15.1 per cent and trimmed inventories by $133.4 billion last quarter.

However, after-tax profits soared 13.4 per cent after only a 0.9 per cent rise in the second quarter.

Paul Ferley, assistant chief economist at RBC Economics Research, said in a commentary the report "is indicative of an only modest recovery in economic activity."

While the jump in corporate profits is "encouraging," he said, "there remains some uncertainty as to whether it reflects aggressive cost cutting or widening margins."

U.S. housing sales and prices continue to rise even while up to seven million more foreclosures might be dumped onto the market. (Gerry Broome/Associated Press)

Another widely followed report released Tuesday showed the rate of home price increases in 20 major U.S. cities slowed in September.

The Standard & Poor's/Case-Shiller home price index rose 0.3 per cent over the month to 146.51. That's its fifth consecutive monthly increase but a dip from August's 1.2 per cent rise. The index is now up more than three per cent from its bottom in May, but still 30 per cent below its peak in April 2006.

Even the co-founder of the index doesn't know the outlook for the U.S. housing market.

Robert Shiller told the Lang and O'Leary Exchange on the CBC News Network on Tuesday that it seems to be an "artificial economy with massive government support" boosting sales and prices, while up to seven million homes now in default may be dumped onto the market if they go into foreclosure.

'I am worried about the future.'—Robert Shiller, co-founder, S&P/Case-Shiller index

"I am scared even though the market is going up now," Shiller said. "I am worried about the future."

"It's the biggest turnaround we've ever seen in the U.S. housing market [since April]," he said. The same rebound is happening in housing in the U.K., Hong Kong and South Korea as well as on stock markets.

"Something is going on market psychology that I can't pin down, but it seems to be real," said Shiller. "Where it goes from here is the big question."

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