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Not Out of the Woods Yet



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This morning’s release of the revised estimates for the nation’s growth during the third quarter of 2009 should be good news, but several details in the report raise a few troubling questions. First, and perhaps most important, even the revised estimates (from November) are positive. The Bureau of Economic Analysis says the economy grew by 2.2 percent between June and September 2009. So, we’ve at least broken the string of negative growth numbers on a quarter-to-quarter basis.   However, this was revised downward from the November preliminary estimate of 2.8 percent. And this was revised downward from its “advanced” estimate of 3.5 percent. In other words, the best estimate of the change in output shaved more than a whole percentage point off the preliminary forecasts. That’s a big hit in terms of forecasting error, and it may well bring into question the reliability of future forecasts and estimates from the BEA. This may unfortunately fuel speculation in some quarters that the agency is no longer acting independently and is rigging at least the preliminary forecast numbers to favor the administration.   A second issue is that source of GDP growth. Most of the growth was in consumer expenditures (1.96 percent) on durable goods (1.36 percent). Growth in the durable-goods sector was almost wholly attributed to purchases of automobiles, trucks, and recreational vehicles. In other words, thank the short-term boost of “Cash for Clunkers” for the goose in consumer spending that makes a much more modest increase in GDP look good.   But advancing sales of cars through government incentives doesn’t improve on the underlying weaknesses of the economy. Burning existing inventories doesn’t create jobs. They just create more space on new-car lots.   Moreover, investment in commercial real estate continued to take a hit, suggesting the we’re far from out of the woods in this sector.   In short, it’s far from clear we’ve turned an economic corner. We’ll need to wait for fourth quarter 2009 results and probably first quarter 2010 before we can have any confidence in the direction of the economy.

— Samuel R. Staley is Robert W. Galvin Fellow and director of Urban & Land Use Policy at the Reason Foundation.



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