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Q3 GDP Growth Review: Is US Economy Headed Out Of Recession?

A pall of gloom seemed to have hit the US economy, with the US commerce department revising downwards, Q3 GDP growth estimates at an annualized rate to 2.2%, from the earlier 3.5%, which had been revised downwards to 2.8%. This suggests that the US economy did not grow as fast as earlier estimates had implied, dampening the positive mood that the economy had swung into.

Even though there has been a downward revision in GDP growth estimates for the third quarter of 2009, it is still the first quarter of positive growth after the onset of recession. US GDP had shrunk by 6.4% in Q1 2009 following a 5.4% contraction in Q4 2008. The positive Q3 growth in the US GDP is attributable to higher consumer spending, improved investment in homes, government spending, better exports and a more gradual inventory reduction. The decline in the new estimates for Q3 appears to stem from a lower revised estimation on the counts of business investment, consumer spending and a faster paring of inventories as against production.

However, lower inventory levels are likely to boost production in the next quarter as demand rises, which could prove positive for GDP growth in the next year. The other worrisome point is that the Q3 US GDP growth received a strong boost from government programs like the cash for clunkers rebate and once the rebate comes to an end, the demand may fall to earlier levels and dampen growth. However, all does not appear to be lost in this game of revisions as US home sales grew robustly in November.

The data analyzed suggested that home sales grew by a robust 7.4% as opposed to the projected 3.3% increase. This news seems to have added wind to the sails of the US economy and stock markets moved upwards on the news, in spite of the downward revision in the Q3 GDP growth estimates. A Federal Housing Agency Report from Washington suggested that home prices fell 1.9% in October from a year earlier.

The combination of lower prices, somewhat improved employment conditions and low interest rates, seems to have led to growth in home sales. The figure of 7.4% was also at its highest in nearly three years signifying renewed interest and possibly a sustainable recovery in the sector. As per reports, over 50% of home sales in November were to first time home buyers, suggesting that they were taking advantage of tax credits allowed to first time home buyers.

The used home sales rate of growth of 7.4% translated into an annualized sale rate of 6.54 million homes in November, as compared to the figure of 6.09 million homes for October. Economists had widely projected an increase of 3.3% or sale of 6.3 million homes at an annualized rate. Supporting this were the low interest rates which fell to 4.88% in November for a 30 year mortgage form 4.95% prevailing in October. All said and done, it appears that the US economy is headed out of the recession albeit slowly and that the government bailout packages and the support being provided by the government at the consumer level at present have played a key role in helping the US economy. Hopefully, the US economy has entered a positive cycle due to the governmental intervention and will continue its forward march into better health this year.

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