Published: Thursday, 29 Oct 2009 | 8:38 AM ET

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The U.S. economy grew in the third quarter for the first time in a year, beating market expectations, as consumer spending and new home-building rebounded, signaling the end of the worst recession in 70 years.

The Commerce Department, in its first estimate of third-quarter gross domestic product on Thursday, said the economy grew at a 3.5 percent annual rate, the fastest pace since the third quarter of 2007, after contracting 0.7 percent in the April-June period.

The growth pace in GDP, which measures total goods and services output within U.S. borders, was above market expectations for a 3.3 percent rate. The economy last grew in the second quarter of 2008.

"Better than expected GDP is confirming that the Great Recession has ended," said Kevin Flanagan, fixed-income strategist for Global Wealth Management at Morgan Stanley in Purchase, N.Y.

"The question going forward is, is this more of a statistical recovery or are we going to get some meaningful momentum on a sustained basis."

Stocks opened higher on the positive data. The dollar rose against the yen, and U.S. government debt prices extended their decline on the better-than-expected reports.

Recessions in the United States are dated by the National Bureau of Economic Research and the private-sector group often takes months to make determinations. The economy slipped into recession at the end of 2007 and has been in the worst downturn since the Great Depression of the 1930s.

The third-quarter recovery was generally broad-based, with solid gains in consumer spending, exports and home construction.

It was also driven by government programs like the popular discount on some new motor vehicle purchases, which stimulated auto sales and production, and a $8,000 tax credit for first-time home buyers.

The auto discount program ended in August and the home tax credit is due to expire next month. In the absence government support, there are fears that the sprouting economic recovery could falter, with rising unemployment also inflicting damage.

Consumer spending, which accounts for over two-thirds of U.S. economic activity, surged at a 3.4 percent rate in the third quarter, the fastest advance since the first quarter of 2007. Spending fell at a 0.9 percent rate in the previous quarter.

Residential investment, which was the main force behind the downturn, jumped at a 23.4 percent rate in the third quarter, contributing to GDP for the first time since 2005, after declining 23.3 percent in the April-June period.

The surge in consumer spending and residential investment was likely driven by government stimulus programs.

The economic recovery in the third quarter was also supported by a sharp moderation in the pace of inventory liquidation by business. Business inventories fell $130.8 billion, slowing from a record $160.2 billion plunge in the second quarter.

The change in inventories added nearly 1 percentage point to real GDP in the third quarter.

Analysts are hoping that the slowdown in the inventory decline by businesses will continue to support the economy in the fourth quarter, even as consumer spending is expected to retreat under the weight of the worst labor market in 26 years.

Excluding inventories, GDP rose at a 2.5 percent rate compared to a 0.7 percent increase in the second quarter.

The weak dollar boosted exports, but a rise in imports subtracted from real GDP during the quarter. Federal government spending contributed to growth, but both state and local governments were a drag.

Business investment fell at 2.5 percent pace, with investment nonresidential structures dropping 9 percent, a reflection of ongoing problems in the commercial property arket.

A separate report from the Labor Department showed the number of U.S. workers filing new claims for jobless benefits dipped by 1,000 last week to 530,000 last week.

Analysts polled by Reuters had forecast claims to fall to 521,000 last week from 531,000.

Continued claims of people still on jobless aid after an initial week of benefits slid by 148,000 to 5.797 million in the week ending Oct. 17. It was the lowest reading since March.

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