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US GDP grows 3.5%: Big deal? - Views on News from Equitymaster
 
 
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  • Oct 30, 2009

    US GDP grows 3.5%: Big deal?

    Pessimists might call it a 'low-base effect'. Optimists might look it as a 'real improvement'. Call it whatever, but the US economy is back in the recovery mode. As reported late yesterday India time, the US has grown by 3.5% YoY during the quarter ended September 2009 (3Q09). This positive growth is the first in five quarters, during which the economy fell off the cliff.

    Data Source: US Commerce Department

    While this growth in the September quarter unofficially ends the country's worst recession in forty years, economists are still doubtful whether this is sustainable. This is given that a large part of this growth in US GDP has been brought about by the government's stimulus program that has helped raise consumer spending, and housing and automobile demand.

    See for instance the cash for clunkers program, wherein the US government was offering a cash subsidy to consumers to exchange their old cars for new ones. This was done with a view to bail out auto companies, which stood on the brink of bankruptcy. Now what this cash for clunkers program has done is push up the automobile output during the September quarter by a massive 158% YoY, which isn't sustainable.

    To put this into GDP terms, according to the US Bureau of Economic Analysis, this surge in automobile production added around 1.6% to the US GDP growth figure reported. Thus without it, GDP growth would have been only 1.9% (3.5% minus 1.6%) during the third quarter!

    As such, if next quarter the automobile production goes down into negative territory as it did just two quarters ago (before the stimulus kicked in), US GDP will most likely take a big hit again.

    In simple terms, this automobile production data goes to show that future demand has been successfully pulled into the present. However, this has effectively wiped out hopes for a genuinely improving US economy in the near term.

     

     

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