GDP Turns Positive, Sort of

U.S. GDP rises 3.5% as stimulus kicks in (MarketWatch, October 29, 2009, Rex Nutting)

The U.S. economy expanded at a 3.5% annual pace in the third quarter, as massive government stimulus helped drag the economy out of the longest and deepest recession since the 1930s, the Commerce Department estimated Thursday.

This is an estimate and will almost certainly get revised.

Along with improvements in key monthly figures on output and sales, the rise in real gross domestic product means the Great Recession is likely over in a technical sense, even as further job losses occur. A formal call on the end of the recession isn’t expected for months

…It was the first increase in real gross domestic product in a year and it was the strongest growth in two years, the government said. Before growing in the June-to-September quarter, the U.S. economy had shrunk for four straight quarters for the first time since the Great Depression.

…In the past year, the economy has contracted 2.3%. The economy shrank 0.7% annualized in the second quarter and 6.4% in the first quarter. The figures are seasonally adjusted and adjusted for price changes.

…Third-quarter growth was due to higher consumer spending, a slowdown in the reduction of inventories, an increase in residential investments, and robust government spending…

How much of the growth was due to stimulus and other forms of robust government spending? The Bureau of Economic Analysis report referenced above can be found here. It gives us a bit more detail on the elements of GDP growth:

…Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change…

Yikes. That is, of the 3.5% growth, fully 1.66% came from motor vehicle output and that, of course, was goosed mightily by Cash for Clunkers. If vehicle output had come in at the same level as the second quarter, then GDP growth would have been only been 2.03% (3.5 - 1.66 + .19 = 2.03).

This chart illustrates what I meant by vehicle sales were goosed by Cash for Clunkers:

Source: Clusterstock

The little sign in the chart indicating a car going off a cliff presumably is suggestive of a likely decline in vehicle sales now that Cash for Clunkers is over. I would be shocked if we did not see a big dropoff in vehicle sales.

So, the good news is that the economy has sped up and we are seeing modest economic growth. The bad news is that growth is still heavily dependent on various government spending programs which are unsustainable.

Comments

[bigbear4511]

Where will the GDP numbers be next quarter without cash for junkers?

2009 Oct 30 04:20 AM

[Old Trader]

bigbear,

As the article points out, roughly half of the "improvement" in GDP was due to C4C, which is history. Just about every report I'm hearing regarding holiday sales looks for "flat", at best.

I think its safe to assume that we'll see a modification/extension of the first time home buyers' credit, but I'll guess it'll come to late to help Q4 GDP much, if at all.

I'll crawl way out on the limb and suggest that Q4 GDP will come in between 0 and +1.5%.

2009 Oct 30 06:51 PM

[Ricard]

As long as it's positive...


On Oct 30 06:51 PM Old Trader wrote:

> bigbear,
>
> As the article points out, roughly half of the "improvement" in GDP
> was due to C4C, which is history. Just about every report I'm hearing
> regarding holiday sales looks for "flat", at best.
>
> I think its safe to assume that we'll see a modification/extension
> of the first time home buyers' credit, but I'll guess it'll come
> to late to help Q4 GDP much, if at all.
>
> I'll crawl way out on the limb and suggest that Q4 GDP will come
> in between 0 and +1.5%.

2009 Oct 30 07:02 PM