Government Incentives Spearhead Third Quarter GDP Growth

Despite growth in US gross domestic product, and increased consumer spending in the third quarter, it remains unlikely that the US economy can sustain growth in the near …

Despite growth in US gross domestic product, and increased consumer spending in the third quarter, it remains unlikely that the US economy can sustain growth in the near term without continued government spending and incentive programs. Although many economists believe the recession has ended, high unemployment rates and a jobless recovery continue to create the perception that the worst recession since the 1930s is far from over for most American families. For more on this, see the following article from Money Morning.

The Obama administration’s $787 billion stimulus package has yielded results as the U.S. economy grew for the first time since the second quarter of 2008.

Gross domestic product (GDP) in the world’s largest economy grew 3.5%, slightly higher than estimates of 79 economists polled by Bloomberg News expecting a growth of 3.2%. U.S. government subsidies on automobiles and housing were the main factors contributing to the gain, as well as a rebound in exports thanks to the weak dollar.

News of the GDP growth in the United States is the biggest indicator that the worst recession since the 1930s is over, and most economists agree that’s the case.

“Better than expected GDP is confirming that the Great Recession has ended,” Kevin Flanagan, fixed-income strategist for Global Wealth Management at Morgan Stanley (NYSE: MS) told Reuters. “The question going forward is, is this more of a statistical recovery or are we going to get some meaningful momentum on a sustained basis?”

Consumer spending gained 3.4%, the most since the first quarter of 2007. The U.S. government’s Car Allowance Rebate System (CARS), better known as “Cash for Clunkers,” played an important role in this growth, as did the services sector, which gained 1.2% — the most since the first quarter of 2008.

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Investments in the housing category, which is one of the main components of the downturn, grew 23.4% — the first time that category has seen growth since the fourth quarter of 2005 and the biggest gain since 1986.

While some props like Cash for Clunkers are gone, many remain, giving the U.S. economy a shot in the arm: Housing continues to get a boost from the $8,000 first-time buyer tax credit and the U.S. Federal Reserve’s purchase of mortgage-backed securities is still keeping lending rates low.

However, it’s unlikely the U.S. economy can sustain growth in the near term without help.  Such measures could include:

  • Keeping Interest Rates Low: Inflation was largely kept in check in the third quarter, rising just a half a percentage point when energy and food is excluded, compared to a 0.8% increase in the second quarter. The Fed is expected to keep the key interest rate at its record lows of 0% to 0.25% after it meets next week, and isn’t expected to raise rates until next year. However, when the U.S. economy does start to show signs of consistent growth, the Fed will have the crucial task of correctly timing an interest rate hike to counter any inflation.
  • Extending the First-Time Homebuyer Credit: Congress will likely extend this incentive, which is slated to expire after November 30. While both parties agree the credit should be extended, there’s some debate on certain amendments to the bill, such as giving existing homeowners a chance at the credit if they’ve owned their current homes for at least five years.
  • Purchasing Mortgage-backed Securities: The Fed last month reiterated its commitment to buy $1.25 trillion of mortgage-backed securities and another $200 billion of debt issued by the government-controlled finance firms Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), which will continue at least through the end of the year.
  • “Dollars for Dishwashers”: Think Cash for Clunkers, but on a smaller scale. This $300 million program is designed to encourage consumers to purchase Energy Star-rated appliances and will once again boost the durable goods category. The government has divvied up the money among the 57 states and territories based on population, and it’s likely to begin in the first quarter of next year.

Officially, The Recession Continues

While most economists agree that the recession ended sometime last summer, the official word for now is the United States is still in the grip of a crippling downturn that has claimed more than 7 million jobs and continues to take more.

The body that officially declares when recessions begin and end, The National Bureau of Economic Research (NBER), won’t likely call the end anytime soon. It wasn’t until December of 2008 that the NBER said what almost everyone already knew: The United States was in the midst of a recession that began in December 2007.

“Unemployment remains unacceptably high for every person out of work, for every family facing foreclosure, for every small business facing a credit crunch, the recession remains alive and acute,” U.S. Treasury Secretary Timothy Geithner said Thursday before the House Financial Services Committee.

Even when the job bleeding reverses, a return to pre-recessionary hiring levels could take years amid a jobless recovery, causing the unemployed to turn a cold shoulder to notions of the recession being over.

“Even though, from a technical perspective, the recession is very likely over at this point,” U.S. Federal Reserve Chairman Ben Bernanke said last month. “It’s still going to feel like a very weak economy for some time, as many people still find that their job security and their employment status is not what they wish it was. So that is a challenge for us and all policy-makers going forward.”

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.


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