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U.S. Economy Rebounds 3.5% in Third Quarter

BY Dave Gustafson   October 29, 2009 at 9:51 AM EDT

An employee at the American Disposables Inc. in Ware, Mass.; Spencer Platt/Getty Images

The growth was the first since the second quarter of 2008, and it was slightly higher than the 3.2 percent expansion economists had forecast earlier this month.

“We’re beginning to crawl out a very deep hole,” economist Ken Mayland, president of ClearView Economics, told the Associated Press. “It will take time to get back to normal again and there are questions about how consumers will hold up in the months ahead. But I think the recovery will be sustained.”

The economic growth was fueled by government programs supporting consumer spending on cars and homes, including the popular “cash for clunkers” program that offered up to $4,500 to buy a new car and a program that offered an $8,000 tax rebate for new homebuyers. Consumer spending rose 3.4 percent in the third quarter, and contributed 2.36 percentage points of the 3.5 percent economic growth.

Spending on big-ticket items, such as cars, jumped 22.3 percent in the third quarter, the biggest rise since the end of 2001 — and a jump that mainly reflected increased car purchases.

A major concern is whether the economy will continue to recover as the impact of those incentive programs and others lessens, and Congress is considering extending the homebuyer tax credit, which is scheduled to expire Nov. 30.

Another question is whether the economic recovery is strong enough for the Federal Reserve to begin raising interest rates from their current near-zero level.

The Fed’s next interest rate-setting meeting is Nov. 3-4, and many observers expect it to leave rates unchanged for now.

“With the jobless rate near 10 percent and the risk of adverse market reaction, now is not the time” to raise rates, economist Michael Ferolli of JPMorgan Chase told the Wall Street Journal.

Although the economy has begun to recover, the jobless rate is still at a 26-year high of 9.8 percent, and Federal Reserve Chairman Ben Bernanke has warned that despite the economic recovery, economists expect the unemployment rate to continue to rise into 2010.