The recovery may have gotten off to a slow start in the third quarter, but a surge in home sales last month could presage a more robust end to the year.
Sales of existing homes rose in November to the highest level in nearly three years, reflecting an extraordinary level of federal support that has pulled the housing market back from its worst downturn since the Great Depression.
The National Association of Realtors said sales rose 7.4 percent to a seasonally adjusted annual rate of 6.54 million from a downwardly revised pace of 6.09 million in October.
Sales had been expected to rise to a pace of 6.25 million, according to economists surveyed by Thomson Reuters.
"Things are stabilizing," said Pete Flint, chief executive of real estate Web site Trulia.com. "There is a significant amount of buyer interest out there."
A rebound in housing could help give the nascent recovery a boost in the fourth quarter after it got off to a weaker-than-expected start in the third quarter.
President Obama, speaking after a meeting at the White House with chief executives of community banks Tuesday, said business have a great opportunity now to start growing and hiring again if they can get the credit they need.
"We feel very optimistic that the worst is behind us," the president said.
The Commerce Department reported Tuesday that the economy grew at a 2.2 percent pace in the July-to-September quarter, slower than the 2.8 percent rate estimated just a month ago. Economists were predicting the figure wouldn't be revised in the government's final estimate on third-quarter GDP.
The main factors behind the downgrade: Consumers didn't spend as much, commercial construction was weaker, business investment was a bit softer and companies cut back more on inventories, according to Tuesday's report.
Despite the lower reading, the economy managed to finally return to growth during the quarter, after a record four straight quarters of decline. That signaled the deepest and longest recession since the 1930s had ended and the economy had entered into a new fragile phase of recovery.
Many analysts believe the economy is on track for a better result in the current quarter.
"We expect a better performance in the fourth quarter, but the core problems for the economy — bust banks and a massively overleveraged consumer — have not gone away," said Ian Shepherdson, chief economist at High Frequency Economics.
The economy is probably growing at a rate of nearly 4 percent in the current quarter, analysts say. If they're right, that would mark the strongest showing since 5.4 percent growth in the first quarter of 2006 — well before the recession began. The government will release its first estimate of fourth-quarter economic activity Jan. 29.
Yet even such growth wouldn't be enough to quickly drive down the unemployment rate, now at 10 percent. High unemployment and tight credit for both consumers and businesses are expected to continue to weigh on the economic recovery. Many economists predict the economy's growth will slow to a pace of around 2 or 3 percent in the first three months of 2010.
Growth in the final quarter is expected to be driven by companies restocking depleted inventories. Stocks of goods were slashed at a record pace during the recession. So even the smallest pickup in customer demand will force factories to step up production and boost overall activity.
Stronger exports, as well as spending by U.S. consumers and businesses, also will help underpin fourth-quarter growth.
It's been a wild ride for the economy this year. In the first three months, it shrank at a pace of 6.4 percent — its worst downhill slide in 27 years.
The recession eased in the second quarter, with the economy dipping at a pace of 0.7 percent. The economy returned to growth in the third quarter.
But much of the third quarter's growth was supported by government stimulus. The "Cash for Clunkers" rebates and an $8,000 tax credit for first-time home buyers buoyed sales of cars and homes. The clunkers program ended in August, though the tax credit has been extended and expanded beyond first-time buyers.
Government stimulus certainly had a hand in helping November home sales. Buyers were racing to complete their sales before the original expiration date of a tax credit for first-time buyers that was scheduled to end Nov. 30. Last month, Congress decided to extend and expand the credit to ensure the housing market could sustain its recovery.
Besides the existing tax credit of up to $8,000 for first-time buyers, homeowners who have lived in their current properties for at least five years can now claim a tax credit of up to $6,500 if they relocate. To qualify, buyers must sign a purchase agreement by April 30.
Foreclosure rates remain a strong drag on the housing market and the economy, however. Employers continue to cut jobs, which is not good news for the record 14 percent of homeowners with a mortgage that is either behind on payments or in foreclosure.
The government makes three estimates of GDP, which measures the value of all goods and services produced in the United States, for a given quarter. Each estimate is based on more complete data. The government's initial estimate for the third quarter was more energetic, showing the economy's growth at a 3.5 percent pace. Subsequent estimates, however, showed the recovery was actually slower.
A trouble spot for the economy — the commercial real-estate market — was clearly visible in Tuesday's report.
Builders slashed spending on commercial building projects at an annualized pace of 18.4 percent in the third quarter. That was sharper than the 15.1 percent pace previously estimated and contributed to the GDP downgrade.
It's unclear how the recovery will fare once the government withdraws stimulus programs put in place to combat the financial crisis and the recession. If consumers pull back on spending, the economy could tip back into recession.
Against that backdrop, the Federal Reserve pledged last week to keep interest rates at a record low to help the recovery gain traction.
Faced with the prospects of high unemployment well into the 2012 presidential election year, President Barack Obama wants the government to take further steps to put Americans back to work. The House last week passed some provisions that Obama has pushed to aid job growth. But it didn't include new tax breaks for small businesses that hire.
The administration credits its $787 billion package of tax cuts and increased government spending with improving employment, though Republicans argue it did not help much.