3.5 Percent

The Lehmann Letter ©

Today the Commerce Department announced (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) that GDP snapped its downward spiral by growing 3.5 percent in the third quarter.

That was good news and the stock market rallied in response.

Close examination of the underlying data, however, provides cause for concern. The GDP grew by roughly $112 billion. Durable goods expenditures, at $55 billion, represented almost half the increase. Most of that was the federal government’s cash-for-clunkers program. It’s over and motor-vehicle sales have consequently fallen. This quarter’s GDP will reflect that decline.

Inventories represented $30 billion of the gain, but in a strange way. They fell by $30 billion less than in the previous quarter, so that’s a smaller negative number rather than a positive gain. It all counts, but we’re not yet at the point where business firms are building inventory in the expectation of rising sales. They’re still cutting back – although by a smaller amount – because their inventories are excessive.

Residential construction, services expenditures, business equipment expenditures and federal expenditures accounted for the remaining gains. If we keep in mind that federal housing assistance underwrote the residential-construction improvement, it’s clear that the federal government played a big role in GDP’s rebound.

The private sector remains anemic.

© 2009 Michael B. Lehmann