Economists are finally uttering the threewords everyone has been longing to hear.
The recession is over.”
Oops. That’s four.
Based purely on the numbers, there seems to be no question that the U.S. economy grew in the third quarter for the first time in more than a year, propelled largely by stimulus-driven gains in consumer spending and homebuilding.
According to the Commerce Dept. figures released today, the world’s largest economy grew at a 3.5 percent pace from July through September. Much of this growth is attributable to the Cash for Clunkers program and residual manufacturing, particularly in the automotive sector.
Household spending also improved more than most analysts had projected. The 3.4 percent increase in consumer purchases was the biggest jump in more than 2 years.
The news has helped snap a 4-day losing streak on Wall Street, and bolstered the dollar, which has been sinking against the other major currencies such as the Euro, Yen, Canadian and Australian dollars. Along with other commodities, crude oil prices rose more than a dollar per barrel on optimism that fuel demand will increase.
Stubbornly, Outlook Remains Clouded
These growth numbers appear to have temporarily allayed investor concern that the 8-month rally in equities has outpaced the actual prospects for recovery.
Going forward, however, the signs of a sustainable recovery are still difficult to read.
For the 12 months ending in June, the U.S. economy shrank 3.8 percent, the worst performance in seven decades. The four consecutive decreases through the second quarter mark the longest stretch of declines since quarterly records began in 1947.
While the third quarter numbers were better than forecast, there is lingering doubt as to whether the economy can sustain this growth pattern through the fourth quarter and into next year.
As we approach the holiday buying season, sluggish hiring and persistent high unemployment will likely weigh down consumer spending, which accounts for about 70 percent of the nation's GDP.
Consumer spending was decimated in the second quarter, when GDP declined at a 0.7 percent annual rate. Thanks partly to the $787 billion federal government stimulus package, which put more money into consumers’ pockets through payroll tax deductions, unemployment checks and other programs, spending in the third quarter turned around.
Even with the spending upswing seen during this past quarter, it is uncertain as to whether there will be a palpable consumer carry-over into the final quarter or significant momentum into next year.
By late spring or early summer, most of the federal stimulus money should have filtered into the economy. Faced with that reality, many economists have expressed deep concern that without additional stimulus, the domestic recovery will weaken.
Handover May Not Work
With mounting concerns over soaring budget deficits, both the White House and Congress are going to be hard pressed to step in with additional stimulus, especially as the mid-term elections approach. But if the economic numbers start to sag with unemployment figures that still remain high, political pressures may force this Democratic President and Congress to bite the political bullet by putting more stimulus money on the table.
After racking up an epic deficit, the President and Congress were hoping to pass the baton to the private sector. Despite the federal government’s record largess, it remains to be seen whether the private sector is fully prepared to step into the race.
Durable goods orders were up 1 percent for September, and a recent Conference Board survey shows that company executives may be gearing up to boost spending for equipment such as computers and software. On the other side of the equation, consumers are still mired in debt. Credit remains tight at every level.
Although Wall Street has staged a phenomenal rebound from its record lows, investors are going to have to scale back their expectations that the stock market will return to its pre-recession highs.
There may not be the type of double-dip recession that some economists still are forecasting. But Fed Chairman Ben Bernanke, along with other policymakers at the central bank, will likely be more vigilant and proactive in preventing a rapid re-inflation of asset values.
Looking ahead, the outlines of the economic horizon continue to be hazy.
One issue remains clear, though. The impending recovery and fiscal outlook are going to hinge almost entirely on the ability of the economy to replace the nearly 7 million jobs that have been lost during the course of this recession.
Unless and until this conundrum is cracked, it’s too early to break out the bubbly and party hats.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
