October 29, 2009 / 1:35 PM / 10 years ago

SNAP ANALYSIS: Will Q3 U.S. GDP be as good as it gets?

WASHINGTON (Reuters) - It didn’t take long for pessimism to creep back in following Thursday’s surprisingly strong reading on U.S. economic growth.

Gross domestic product grew at a 3.5 percent annual rate, beating the consensus forecast for a 3.3 percent pace. But two of the biggest contributors — spending on durable goods and residential investment — received substantial boosts from Washington’s emergency rescue efforts.

“Sure, the economy’s standing up on its own legs again, but for how long once the government stimulus starts to fade?” said Chris Rupkey, an economist with Bank of Tokyo-Mitsubishi in New York. “That’s the million dollar question for the nation’s unemployed — all 15.1 million of them sitting idle, through no fault of their own.

What gives Rupkey and some other economists pause is that a large portion of the jump in consumption can be traced back to the government’s “cash for clunkers” program that provided incentives to buy new cars.

Excluding motor vehicles, third-quarter GDP advanced at a more modest 1.9 percent pace. To be sure, that was a vast improvement, following four consecutive quarters of declining GDP, but it was dangerously close to stalling.

The turnaround in residential investment, which added to GDP for the first time since 2005, was also a bright spot, although it remains to be seen how much of that improvement was linked to government efforts to prop up the housing market.

Congress is debating whether to extend an $8,000 tax credit for first-time home buyers, which has been credited with helping to boost home sales.

Arguably the biggest lift to the housing market has come from the government’s support of mortgage finance giants Fannie Mae and Freddie Mac, and the Federal Reserve’s $1.45 trillion program to buy mortgage-related assets — which have helped keep mortgage rates down.

The Obama administration has pledged to come up with a plan for the future of Fannie and Freddie by early 2010, and the Fed’s asset purchase program is due to be phased out at the end of March. That leaves a huge question mark hanging over the housing market going into 2010.

The surprisingly strong GDP growth also poses tricky questions for the Fed, which holds a policy-setting meeting next week.

As the economy stabilizes, there will be growing pressure on the Fed to reverse emergency lending programs and begin to normalize interest rates, which are now near zero.

However, Wells Fargo chief economist John Silvia said lingering doubts about the recovery’s sustainability mean the Fed will stay on the sidelines.

“Core issue: how much of this is sustainable without Fed programs?” he said. “We estimated 2.4 percent (GDP growth) for 2010.”

Editing by Jeffrey Benkoe

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