Recovery's pace slower than first thought

updated 2:15 p.m. ET Nov. 24, 2009

WASHINGTON - The economy is growing modestly, with consumers too wary about spending to invigorate the recovery.

That's the picture that emerged from reports Tuesday on the economy and the confidence of consumers, who power 70 percent of it.

Unemployment and tight credit have sapped shoppers' willingness and ability to spend freely as retailers enter their crucial holiday season. And Americans are expected to grow more cautious about spending next year. That would make for a plodding recovery.

The economy grew at a 2.8 percent rate last quarter. Forecasts for the current quarter are for similarly lackluster growth before a drop-off next year.

"It's hardly a rip-roaring recovery," said Stuart Hoffman, chief economist at PNC Financial Services. "Usually coming out of a recession you get growth more like a rodeo bull — at a pace of 6 or 7 percent in the early quarters of recovery. That isn't happening. It is coming out of the stalls more like a fat cow."

The Commerce Department's revised estimate of gross domestic product for July through September was less than the 3.5 percent growth rate foreseen just a month ago. And the estimate for GDP — the value of goods and services produced in the United States — was a tad less than the 2.9 percent growth rate that economists surveyed by Thomson Reuters had expected.

The main factors behind the downgrade: Consumers didn't spend as much. Commercial construction weakened. And imports exerted more of a drag on the economy. Businesses also trimmed more of their stockpiles, further restraining growth.

At the same time, the Conference Board's latest survey of consumer confidence found gloom among shoppers.

"I really won't be spending money on Christmas," said Ivan Horne, 47, of Tampa, Fla., who has been out of work for about a year. "I'm barely able to make enough to survive."

An Associated Press-GfK poll released this week found that 93 percent of Americans say they'll spend less this holiday season or about the same as last year.

Also Tuesday, the Standard & Poor's/Case-Shiller home price index of 20 major cities suggested that the summer's trend of rising home prices is slowing. And analysts expect prices to dip again this winter as foreclosures rise.

The tepid reading on economic growth and consumer confidence caused stocks to retreat from their 13-month highs. The Dow Jones industrial and other stock averages were down slightly in early-afternoon trading.

Over the past few months, though, the stock market has surged. A rally on Monday carried the Dow up 133 points to its highest point in just over a year.

In part, stocks have been powered by a weak dollar and low interest rates. Lower rates let companies and investors borrow cheaply. They also cause some to shift money out of cash and bonds and into investments that promise higher returns, such as stocks.

Stocks also have benefited from higher corporate profits. Companies have managed to squeeze out more profits without the cost of higher production or payrolls. They've done so by boosting their workers' productivity and drawing down their existing stockpiles of goods.

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