Diane Swonk, Chief Economist
Oct. 29, 2009 – 7:30 a.m. CT
Economy Moves Back into the Black
Real GDP rose at a 3.5% rate in the third quarter – its first significant move into the black since the fourth quarter of 2007. (Real GDP growth moved modestly into the black in the second quarter of 2008, supported by surging exports and the $150 tax rebate program, but quickly slipped off the cliff again in the third quarter of 2008.)
A combination of good news and abating bad news supported growth: residential investment posted more than a 20% gain – its first double-digit increase in over three years – after sinking to unthinkable lows at the start of the year; consumer spending rebounded on the heels of the Cash for Clunkers program (the auto rebound alone accounted for almost half of the rise in GDP); stimulus spending by the federal government helped to offset losses in state and local government spending; exports reaccelerated; and the pace of inventory liquidation abated.
Moreover, at least some of that "strength" will be carried into the fourth quarter: residential investment is expected to post another modest gain as home buyers try to take advantage of the first-time buyer tax credit (which is currently set to expire December 1, but will likely be extended); pent-up demand and some spillover from the recent increase in home sales is expected to buoy consumer spending; exports, particularly of heavy equipment, is expected to continue to show some momentum given the push to build roads and infrastructure in China and Brazil (Rio should be gearing up soon for the 2016 Olympics); and the pace of inventory liquidation is expected to continue to abate. Vehicle producers, in particular, are expected to continue to restock in the wake of the summer surge in sales. Even used cars are getting hard to find on dealer lots.
We also could see some turnaround in the jobs picture by December or January now that layoffs are abating (unemployment claims dipped slightly to 530,000 in the most recent week, and continuing claims are contracting – which is more good news). Any initial increases in jobs, however, are likely to be minimal. Small businesses, in particular, are going to have to hoard a lot more cash before they feel confident enough to hire, given the constraints that they are experiencing in the consumer credit market (much of the growth in small businesses over the last two decades was driven by an increase in consumer credit – cards and home equity lines of credit – which is getting squeezed by both cyclical write-offs and the constraints imposed by the new consumer protection laws which go into effect on December 1).
The Bottom Line: The recovery has begun, but there is no guarantee that it is sustainable. Moreover, any gains we do see are expected to be modest relative to history, especially given the depth of the declines we have experienced. Crack a beer, but save the champagne for another year.
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