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Government report is expected to mark end to recession

Forecasters say the report is likely to show the economy resumed growth in the third quarter after four straight quarters of contraction. But positive GDP numbers are unlikely to spur hiring.

October 29, 2009|Don Lee and Alana Semuels

WASHINGTON AND LOS ANGELES — Struggling business owners and millions of unemployed Americans may not believe it, but the government is expected to report today that the U.S. economy turned a corner and resumed growth in the third quarter in what would mark the end to the worst recession since World War II.

Forecasters say the economy probably expanded at an annual rate of about 3% in the three months ended Sept. 30, a solid performance driven largely by the federal stimulus package and improved business spending. The growth -- coming after four straight quarters of contraction -- is the evidence most economists say is needed to declare victory against the recession.

"We're on the start of a recovery track and one that is sustainable," said Lynn Reaser, an economist and president of the National Assn. for Business Economics.

But even if the new gross domestic product numbers are in the expected range, it would not be the breakthrough turnaround needed to reverse the dramatic 6% decline in GDP last fall and winter. It's also unlikely to spur significant new hiring. A number of forecasters are predicting weaker expansion in the fourth quarter and in the early part of 2010.

Not until the middle of next year, at the earliest, is the U.S. economy expected to gather enough momentum to put a meaningful dent in the nation's high unemployment rate.

Adding to the skepticism about what the uptick in growth will mean was a Commerce Department report Wednesday showing that new-home sales dropped unexpectedly in September. The report prompted Goldman Sachs to downgrade its expectations for the third-quarter GDP growth rate from 3% to 2.7%.

A revival in the depressed home-building industry was seen as a positive for the economy in the third quarter -- the first since late 2005. The housing market has been boosted by the federal government's $8,000 tax credit for first-time home buyers, a program that is scheduled to expire at the end of November. Although Congress is considering an extension of the tax credit, the housing market's rebound remains fragile.

"The conviction that the recovery is going to be strong enough is just not there," said Ross DeVol, director of regional economics at the Milken Institute think tank.

When the recession began, he said, businesses made giant cuts to their payrolls, anticipating that the slowdown would mirror the Great Depression. That led productivity -- or output divided by work hours -- to surge 6.4% from April through June of this year, the largest gain in almost six years. In previous recessions, productivity has tended to fall.

Now, even though employers realize that the economy isn't quite as bad as they had anticipated, DeVol said, they aren't ready to believe that a recovery has begun.

Jim Shanman is a case in point. His Los Angeles graphic design and marketing studio, Asylum, is experiencing the biggest slump he's seen in 24 years, and he laid off two employees since business slowed late last year.

As a result, Shanman says, he is "wearing 17 hats instead of the usual 10, but you have to do what you have to do in tough times." He has no full-time employees and depends on freelancers to do work he can't complete himself.

Shanman is starting to see some signs of recovery: A bank client has agreed to go forward on a project it wouldn't have considered six months ago, and new clients seem more eager to commit to contracts.

Yet he has no plans to hire new employees until mid-2010 at the earliest.

"We need to get back to where we're profitable and we know that we can maintain it over a certain period of time," Shanman said.

Economist Reaser is more upbeat about the employment picture. She notes that the economy grew in the third quarter even as total work hours fell 4.8% during that period at an annual rate. If GDP expanded at a 3% annual pace as expected, she said, that would mean productivity gains were approaching 8% at an annual rate, which is unsustainable.

Reaser believes that many businesses are at a turning point, at which they must soon add hours and workers to produce more and capture sales in a growing domestic and global economy.

"The unemployment rate is always a lagging indicator, and it will take some time," she said.

Not everyone would agree. Peter Morici, a professor at the University of Maryland and former chief economist at the U.S. International Trade Commission, says that the economy needs to have annual growth rate of 3% or more over at least three quarters to add enough jobs to bring down unemployment.

"I don't see a rosy picture," he said.

Sluggish hiring and persistent high unemployment will weigh down consumer spending, which accounts for about 70% of the nation's GDP.

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