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US economic rebound smaller than thought, but Fed optimistic

business Updated: Nov 25, 2009 13:47 IST
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The US economy's rebound from a deep recession was smaller than initially thought, according to new government figures, but the Federal Reserve said it expects the country's recovery to pick up the pace in the coming year.

The Commerce Department in an updated estimate on Tuesday said the world's largest economy grew at an annual rate of 2.8 per cent in the third quarter, the fastest rate in two years.

But while the figure confirmed that the US has likely emerged from its deepest recession in decades, it was lower than the department's first estimate of 3.5 per cent.

The lower number had been expected by economists, the result of worse-than-predicted consumer demand and a widening trade deficit in September. US stocks fell slightly on Tuesday on the news.

Also on Tuesday, consumer confidence rose slightly in November after two straight months of declines, according to the private Conference Board's monthly index, reflecting cautious optimism as the country embarks on an uneasy recovery.

The third quarter marked the first growth period since the second quarter of 2008 and was mostly due to higher consumer spending, exports and massive government spending to revive the economy.

Consumer spending, which accounts for about two-thirds of the country's economic output, climbed 2.9 per cent in the third quarter after dropping 0.9 per cent in the previous three months. Exports surged 17 per cent after falling 4.1 per cent in the second quarter.

The improved consumer demand was a reason for the Federal Reserve to increase its own forecasts for growth in the coming year. But the central bank also warned that unemployment will remain for some time at its highest levels in a generation.

The Fed projected the economy will shrink 0.1-0.4 percent this year and grow by 2.5-3.3 per cent in 2010. That compares to June's prediction of a contraction of 1-1.5 per cent in 2009 and a gain of 2.1-3.3 percent next year.

The recovery will not be strong enough to make a major dent in unemployment, which stood at a 26-year high of 10.2 per cent in October. The Fed said the jobless rate will fall to 9.3-9.7 per cent in 2010, roughly in line with its June forecast.

The Fed also noted that the outlook remained gloomy for many households, especially as massive public spending measures to prop up the economy are likely to be phased out next year.

"Uncertain job prospects, slow income growth and tight credit ... were seen as weighing on consumer confidence and the growth of consumer spending for some time to come," the Fed said in the minutes of its last board meeting in early November.

The New York-based Conference Board said its index of consumer confidence climbed to 49.5 in November from 48.7 the previous month. The index had fallen in October and September.

Lynn Franco, director of research at the organisation, said the improvement reflected a slightly rosier view of business and labour conditions.

But Franco said US consumers' outlook on the economy remained sour ahead of a crucial few months for US retailers. "Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood."

Most economists believe the country's worst recession since the Great Depression of the 1930s ended towards the beginning of the summer months.

The US economy shrank 0.7 per cent in the second quarter and a massive 6.4 percent in the first three months of 2009 in the depths of the recession, which began in December 2007.

Rebecca Blank, undersecretary of commerce, said she expected growth would continue in the last three months of this year, with public spending and "increasing economic health spurring growth in many sectors of the economy".

But Nigel Gault, the chief US economist of IHS Global Insight, told Bloomberg News that the downward revision in the growth figures suggested "the recovery did not begin as strongly as first thought".