GDP Growth: Step One on a Long Road Back to Recovery

It's official: the U.S. economy expanded by 3.5% in the third quarter, the Bureau of Economic Analysis reported Thursday. Encouraging as that is, it's neither a surprise nor anything near closure for the financial and economic hurricane of the last year or so. But it is a step in the right direction, albeit a tentative and not-yet fully confirming step that the walk ahead will be equally brisk.

Nonetheless, good news is worthy of celebration at this point, if only for a moment. After four straight quarters of retreat, a gain in GDP is no trivial change. All the more so when we dive into the numbers and learn that the expansion was broad based. All the major categories that factor into the final GDP calculation posted healthy gains in Q3. That is, personal consumption expenditures, gross private domestic investment, exports and government spending were higher during the three months through September. That compares with red ink on those ledgers in past quarters, save for government spending and a mild rise in consumer spending in Q1 2009.

Otherwise, this is the first time in more than a year (or two, depending on your perspective) since the GDP report showed unambiguous growth across the board. If there's a single report that confirms that the economy has dodged a bullet—i.e., avoided a deeper, prolonged contraction—today's update is it. Thanks largely to Bernanke's Fed, the central bank's great mistake in the 1930s—keeping monetary policy too tight after the economic slump—has been avoided this time. GDP's Q3 report tells us so in no uncertain terms.

Indeed, it's no small trick to elevate consumer spending in the wake of the deepest economic recession since the Great Depression. And yet the numbers in our table below show that Joe Sixpack has been pulling out his wallet and spending across the board. This is no free lunch, of course, and so there will be a price to pay for juicing consumer spending at a time of mounting debts and default. But the bigger risk, albeit temporary risk, was allowing spending generally to seize up. We've avoided that trap, at least for the moment, although we fear that we've traded a large acute problem for a modest chronic one that lingers.

In short, there are caveats lurking behind today's sunny GDP report. Many caveats. For now, we'll simply note one. The jump in durable goods, for instance, was assisted in no small way by the government's cash-for-clunkers stimulus program that boosted (or seemed to boost) auto purchases in recent months. That was a one-shot deal, of course, and it's not clear that the additional spending generated by the plan didn't simply transfer future spending activity into the present. Indeed, a report by Edmunds.com, via The Christian Science Monitor, charges that the cash-for-clunkers program gave money to consumers who would have bought a car regardless of the government's efforts.

The fact that the Fed has been effectively giving money away for much of the past year, combined with various fiscal stimulus efforts, ensured that liquidity would be spilling over into every nook and cranny of the economy. Some of this liquidity was destined to show up as new consumption. If you print it, they'll spend it; at least some of it.

Helping the process along has been the snapback effect. Early in 2009, the economy was going to do one of two things: collapse or bounce back. The Fed's efforts helped tip the scale more than a little to the latter, and we continue to see the effects. Indeed, the clues leading up to Thursday's news of GDP's Q3 rise have been bubbling for some time, as we've been noting for months.

But the snapback effect has limited reach, as do the government's various stimulus efforts. The true judge of the post-apocalyptic world of last autumn can't be judged—shouldn't be judged—by the Q3 GDP report alone. Yes, we've learned the lesson of how to manage monetary affairs in the immediate aftermath of a severe financial crises/recessions. But the lessons, and the solutions, for the period beyond that early post-crash period remain much more of a gray area with less-obvious policy responses, if any.

We're now moving into uncharted territory. Yes, we've arguably laid a foundation to provide the economy with a fighting chance of maintaining stability. Fostering growth, on the other hand, remains a challenge of some magnitude with no easy answers, as the ongoing slump in the labor market reminds. Part of the problem is that there are so few periods to study in recent history. Japan in the 1990s and the U.S. in the 1930s are the main precedents, and neither offers compelling insights beyond the immediate snapback period.

Regardless, the U.S. economy faces a number of challenges, few of which are of the garden variety, starting with debt. Another is the labor market, which was showing signs of strain well before last year's debacle. As we pointed out earlier this month, the labor market rebound following recessions over the past 25 years has been increasingly mild. Given the context this time around, there's little reason to think the trend will abate. If anything, it seems likely to accelerate.

So, yes, let's cheer Thursday's GDP report. But let's reserve judgment on whether we won the war or merely survived the first battle.

Comments

[repofinder:]

And we're just supposed to trust these Government "reports"?

How can they say we're out of a recession when home foreclosures are surging still (see foreclosure.com) and auto repossessions are skyrocketing (see repofinder.com)? I track this stuff all day long and the root of the problem is NO JOBS!!!

I'll trust my magic 8 ball over Government "reports".

Oct 29 12:06 PM

[Dave Wrixon:]

If Bernanke believes these numbers then he has to draw down the money supply and hike interest rates. We will soon see whether he believes them any more than I do.

Oct 29 12:34 PM

[AxIt:]

If you wish to go for a double dip recession you are absolutely right.
Otherwise just sit back and relax. By now.

On Oct 29 12:34 PM Dave Wrixon wrote:

> If Bernanke believes these numbers then he has to draw down the money
> supply and hike interest rates. We will soon see whether he believes
> them any more than I do.

Oct 29 02:01 PM

[Mad Hedge F...:]

nch Those of you who heeded my GLOBAL RISK ALERT on October 13(click here for report at www.madhedgefundtrader...) missed the top of the market by six trading days and 10 S&P points. I’m sorry; I’ll ring the bell more precisely next time, with a more accurate date and time. Since then, technical sell recommendations have been breaking out like acne at a junior year prom dance. You are all now out of your positions or love them so much that you are willing to carry them through another crash. At the risk of hubris, even PIMCO’s Bill Gross has jumped on the bandwagon, although I doubt he needs my help ascertaining the direction of stocks and bonds. The way everything turned tail and ran at exactly the same time was a complete vindication of my theory that a tsunami of liquidity was raising all boats, completely unjustified by the underlying fundamentals. Long time readers of this letter know the only short I have advocated this year was in long dated Treasury bonds through the TBT. But the better than expected Q3 GDP of 3.5%, obviously fueled by temporary government programs like “cash for clunkers” and the first time homebuyers tax credit, may be presenting one of those pristine, “sell on the news” moments. Will this data finally give us our long awaited double top? Fading rallies in stocks is looking more enticing by the day.

Oct 29 02:15 PM

[Big Bubbette:]

Well said Mad. Anyone that thinks this data points to a recovery is staring at the hole and not the donut.
Disclosure: I am not invested in Krispy Creme (except for the one on my desk).

Oct 29 02:39 PM

[debtacid:]

Time to remind everyone of the five rules of propaganda:

1. The rule of simplification: reducing all data to a simple confrontation between 'Good and Bad', 'Friend and Foe'.

2. The rule of disfiguration: discrediting the opposition by crude smears and parodies.

3 The rule of transfusion: manipulating the consensus values of the target audience for one's own ends.

4 The rule of unanimity: presenting one's viewpoint as if it were the unanimous opinion of all right-thinking people: draining the doubting individual into agreement by the appeal of star-performers, by social pressure, and by 'psychological contagion'.

5 The rule of orchestration: endlessly repeating the same messages in different variations and combinations.

Oct 29 04:37 PM

[Options Tra...:]

The final confirmation needs to come from a turn in unemployment rate.

Oct 29 10:14 PM

[enigmaman:]

The GDP results were not un expected, the GS downward revision was, and appears to have been the trigger for the sell off and then big bounce back when it came in higher, so if GS GDP revision never happened the market probably would not have sold off and probably wouldnt have run up as it did on the actual news, so in the end it all amounted to a zero net gain, but the markets 2 day reaction to this did bring volatility back into focus and IMO that shed more light on just how fragile this market really is

Oct 30 07:13 AM

[Shaftsinker:]

Zero net gain for everyone except GS...

They rode down their own manufactured sell off and hitched themselves to the bounceback they created. It'd be genius if it weren't so corrupted, manipulative, and borderline evil.

On Oct 30 07:13 AM enigmaman wrote:

> The GDP results were not un expected, the GS downward revision was,
> and appears to have been the trigger for the sell off and then big
> bounce back when it came in higher, so if GS GDP revision never happened
> the market probably would not have sold off and probably wouldnt
> have run up as it did on the actual news, so in the end it all amounted
> to a zero net gain, but the markets 2 day reaction to this did bring
> volatility back into focus and IMO that shed more light on just how
> fragile this market really is

Oct 30 11:41 AM