The initial estimate pegging third-quarter growth at 3.5 percent is good news. That’s the first substantial expansion in two years. It’s also generally consistent with other data (e.g. a stabilizing housing market, reduced rate of contraction in labor markets) suggesting recovery is at hand.
But don’t pop those champagne corks just yet. The fact is the underlying trend growth was much less than the topline figure suggests. For example, car purchases added a full percentage point to the growth rate. Everyone expected the cash-for-clunkers program to artificially pump up third-quarter consumer durable purchases, by filching them from the future. That future is now, and so auto purchases are likely to be anemic well into 2010, especially as unemployment continues to increase.
Similarly, whatever small effect the $8,000 first-time homebuyers tax credit had on housing, it too served only to pull purchases into the third quarter and reduce such buying well into 2010. Residential real estate swung from subtracting almost 0.7 percentage point to adding 0.5 percentage point. Expect this to strength to evaporate, especially as mortgage rates are now climbing.
Inventories provided another fleeting growth pop, adding 0.9 percentage point. Businesses had dramatically cut inventories, so a significant rebuild was certain. It’s a welcome instance of overall business investment, but restocking inventories is a transitory phenomenon, not a source of sustained growth.
Altogether these three transitory elements contributed 2.4 percentage points to the topline 3.5 percent number. Ignore them and you’re left with positive but weak growth of just over 1 percent.
Even anemic growth suggests a transition from recession to recovery; it also means the policy debate now shifts from whether fiscal stimulus would help the economy to whether it is helping the economy. While the debate has shifted, the answer remains no, and no, for reasons explained elsewhere.
The U.S. economy has demonstrated incredible resilience as it recovers from shocks in the housing and financial markets. It would recover whatever the government did, and, in fact, the Federal Reserve has done a lot.
Fiscal stimulus, however, did nothing but add to the nation’s debt. The truism that there is no free lunch still holds true. Deficit spending only adds to the economy by borrowing and thereby taking out of the economy. The recent growth figures demonstrate the underlying strength of the economy, not the efficacy of issuing government debt as stimulus. Alchemy is still alchemy.
–J. D. Foster is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at the Heritage Foundation.