Reality Hits: Q3 GDP Growth Breakdown

sequoia

By William M. Wright October 30, 2009

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. I've broken down the GDP drivers by its sub-components.

The 3.5 percent GDP growth rate in the July-to-September quarter represented the first positive growth, after four straight quarters of declines.

It was the largest gain in two years. But the concern is that this growth will falter, given the huge problems still facing households.

Yes, much of the increase can be attributed to the government's controversial Cash-for-Clunkers and New Home Buyers refundable tax credit program. The real test for the economy will be the upcoming Q4 2009.

Most economists don't expect the economy to grow quite as much in coming quarters, but they aren't forecasting a double-dip recession, either. Most see growth in the 2% to 3.5% range. While the need for inventory restocking will help drive GDP in Q4, with the auto stimulus gone, I'd say 2% is all we can expect. The adjustment in inventories could add to growth for two more quarters. But with unemployment remaining extremely high, business will remain cautious on their orders.

The big question confronting policymakers, investors, consumers and economists is whether the economy will be able to stand on its own, as the federal government's stimulus begins to wane.

Here is a breakdown of this quarter's GDP drivers:

1.36 percentage points of the 3.5 percent third-quarter growth in GDP came from consumer spending. Car sales alone represented 1 percentage point of total growth, reflecting the success of the government's Cash for Clunkers program.

This is the biggest question facing the fledgling recovery, given that consumer spending represents 70 percent of total economic activity. Can consumers keep spending with unemployment at a 26-year high of 9.8 percent and expected to keep rising until next summer?

1.22 percentage points of the 3.5 percent GDP growth came from investment, with nearly half that strength coming from a surge in residential construction, an area that had been plunging since 2006.

The $8,000 new home buyer refundable tax credit was a major contributor, along with falling prices. Much of Business spending on computers and other equipment showed gains, but spending on commercial structures such as office buildings and shopping centers continued to decline.

0.48 percentage points of GDP growth in third quarter came from the increase in government spending.

All the strength in third-quarter government spending came from a 7.9 percent rise in spending at the federal level, reflecting in part the boost from the stimulus program. That offset a 1.1 percent drop in state and local spending, where budgets have been hard-hit by the recession. The expectation is that the stimulus program, which is helping states weather the recession, will keep government spending growing in coming quarters.

It seems the Market has hit the DJIA 10,000 wall and now regardless of the continued proof-of-economic news, sellers outnumber buyers. With so many large institutional investors watching the market technicals, the only question I have is, do we get one more bounce off the trend line and try at 10,000 or do we break next week and head back to 9,500 - 9,200 range?

acura

thx