The U.S. economy's return to growth during the third quarter shows stability has been regained but recovery is fragile and needs nurturing, Treasury Secretary Timothy Geithner said on Thursday.

The government estimated that gross domestic product grew at an annual rate of 3.5 percent from July through September. Still, Geithner said the government must be ready to reinforce growth if needed to avoid risks of a credit crunch.

In a one-hour question-and-answer session at the Economic Club of Chicago, Geithner said the United States can't borrow-and-spend its way to health and pledged every effort to encourage an investment-led recovery.

The (GDP) number today was really encouraging....it was broad and strong and it wasn't just cash-for-clunkers and it wasn't just economic stimulus...but it's important to remember that it's very early, said Geithner.

U.S. economy grew in the third quarter for the first time in over a year as stimulus spending helped lift consumer spending and home building, fueling an unexpectedly strong advance.

BACK ON FIRM GROUND

The economy is stabilized. You can see signs of growth here and around the world, Geithner said.

But he added: It's going to be very hard going forward still. The important things that we're going to have to do are to recognize that recovery's going to have to be led by the private sector and it's going to have to be driven by private companies, private businesses.

Given the hefty budget deficits the government is running, which would be unsustainable over a long period, Geithner said it will be more important than ever that the private sector step up to keep growth going.

It's going to have to be investment-led and led by exports to a greater extent than in the past because we're not going to be able to borrow-and-spend our way out of this, he said.

Geithner said there was still a substantial amount of additional reinforcement still to come from the $787-billion economic stimulus program that the government introduced earlier this year, only about half of which has been spent.

That'll provide some ongoing support but we're going to have to continue to reinforce that process, he said.

In the financial system, although there's been a remarkable improvement in confidence and credit is much more easily available...you face the classic risk of a credit crunch slowing the pace of recovery so we're going to have to reinforce the basic process of healing.

REAL ESTATE WOES MANAGEABLE

He expressed confidence problems in the U.S. commercial real-estate sector would not drag down the wider economy.

I think that's a problem the economy can manage through, he said, but noted it's a difficult thing for policy to address.

Geithner turned aside a question whether taxes might have to go up to help deal with deficits, commenting that wasn't the direction the Obama administration was aiming.

I don't think anybody would argue that it would be good for the country to raise taxes, he said. The president's priority and our focus is going to be doing what it takes to lay the foundation for a recovery led by private investment, he said.

Geithner said the key to getting deficits down was to get the economy growing again at a healthy and sustained rate.

The Obama administration reported a record U.S. budget deficit for the fiscal year ended September of $1.4 trillion, or nearly 11 percent of GDP, the biggest fiscal shortfall since World War 2.

The White House has forecast deficits of more than $1 trillion through fiscal 2011.

Commenting on the Obama administration's financial regulation overhaul, Geithner said it enjoyed broad support and was on track to achieve major reforms despite resistance from some politicians.

(Reporting by Karen Pierog and Glenn Somerville, editing by Andrew Hay)

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