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The Economy Grew 3.5% in Third Quarter

The Bureau of Economic Analysis reported the economy grew 3.5 percent in the third quarter of 2009.  This is certainly good news as it is the first increase in quarterly Gross Domestic Product (GDP) since the second quarter of 2008 and the largest since the third quarter of 2007.

Yet if you delve into the numbers one should be cautious of too much optimism.  The component which had the largest impact on the growth of GDP was personal consumption expenditures (PCE), specifically that of motor vehicles.  This was the result of the government program “Cash for Clunkers”, which enticed car buyers to trade in their old vehicles for a new fuel-efficient one—with the help of a federal government subsidy. 

One other component which had an impact on the growth of GDP was changes in inventories.  For the past couple of years inventories have fallen as firms, which faced falling demand for their goods, chose not to replenish their shelves and warehouses.  Face with limited goods, firms began to replenish their inventories for the upcoming Christmas season. 

I am sure President Obama’s economic advisers will be out in force telling everyone this is evidence that the president’s economic policies are working.  They should be cautious.  One quarter’s growth in GDP does not make a recovery.  Auto sales have fallen significantly since the end of the “Cash of Clunkers” program in late August.  As well, if holiday sales are stagnant, businesses will be reluctant to continue to restock their shelves.  Unless consumers pick up their purchases of non-automobiles in the final three months of 2009, the U.S. economy will not see such robust growth in the fourth quarter.

© 2009 Tax Policy Forum.