Early data released yesterday showed the Great Recession that began in late 2007 unofficially ended in Q3 as the economy expanded at an annual rate of 3.5%.
I think it’s worth taking a moment to see what drove the economy forward last quarter and try to determine what might happen over the next several months.
First of all, 2.36 percentage points of of growth, nearly two-thirds of the gain, came from an improvement in personal consumption. Since personal consumption makes up 70% of total economic activity, stingy consumers, who have been hunkering down, opened up their billfolds and helped to drive the first increase in GDP in five quarters.
Drilling down a bit further, durable goods made up 1.79 percentage points, including 1.47 percentage points from automobiles and parts. What does this all mean? Simple, cash for clunkers played a major roll in Q3’s economic turnaround.
Moreover, 0.48 percentage points came from higher government spending. So it doesn’t take a math whiz to realize that over half the rise in GDP came from the government’s stimulus package.
Unfortunately, the sugar high the auto industry received from the cash for clunkers program has quickly faded, and we probably won’t see gains from the auto sector extending into Q4.
But there are some bright spots going forward.
Businesses are starting to ramp up production again, with inventory accumulation adding 0.94 percentage points to economic activity. And because excess stockpiles were rapidly depleted in the earlier months of the recession, we may continue to see improvements in this category.
Consumer spending may be a bit tenuous going forward since job anxieties remain high and balance sheets are still in need of repair. If nonfarm payroll growth begins to tick higher by year end and continues to occur into 2010, consumer spending may finally begin to contribute to growth on a more permanent basis.
Hence, there are good reasons to be cautiously optimistic.
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