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American economy grows 3.5%. But how sustainable?
American economy grows 3.5%. But how sustainable?
The economy grew at a 3.5 percent pace in the third quarter, the best
showing in two years, fuelled by government-supported spending on cars and
homes. It was the strongest signal yet the economy entered a new phase of
recovery and that the worst recession since the 1930s has ended.
The government issues its first estimate of gross domestic product for
the third quarter Thursday, and it's expected to validate the belief that the
Great Recession is over.
Many analysts expect the economy returned to growth in the
July-September quarter, expanding at a pace of 3.3 percent. If they are right,
it would end the streak of four straight quarters of contraction, which started
in December 2007, the first time that's happened on records dating to 1947.
The third-quarter growth rate forecast by Thomson Reuters would be the
best showing since a 3.6 percent pace logged in the third quarter of 2007.
But while the economy appears stronger, unemployment continues to rise
and there is the big question of whether the growth will stall after government
supports are gone?
"It's good to have the economy growing again, we'll take it. But we
don't think that rate of growth is sustainable because it is distorted by all
the government stimulus," said Brian Bethune, economist at IHS Global
Insight. "The challenge here is to get organic growth — growth that isn't
helped by fiscal steroids."
Federal Reserve Chairman Ben Bernanke and members of President Barack
Obama's economics team have warned that the nascent recovery won't be robust
enough to prevent the unemployment rate — now at a 26-year high of 9.8 percent
— from rising into next year.
Economists say the jobless rate probably nudged up to 9.9 percent in
October and will go as high as 10.5 percent around the middle of next year
before declining gradually. The government is scheduled to release the October
jobless rate report next week.
Rising unemployment and continuing difficulties by both consumers and
businesses to secure loans are among the forces likely to weigh on the
recovery.
Consumers, who cut spending in the second quarter, are expected to show
a burst of energy in the third quarter. Some analysts predict consumer spending
rose at a rate of at least 2 percent in the third quarter, with most of that
going to buy new cars.
Auto sales were temporarily boosted by the government's Cash for
Clunkers program. It gave people a rebate of up to $4,500 to buy new cars and
trade in old gas guzzlers. After the program ended in August, auto sales tanked
again.
Another force expected to feed third-quarter growth is improved home
sales, which have been helped by the government's $8,000 tax credit for
first-time home buyers. Congress is considering extending the credit, which
expires on Nov. 30.
Even though the government reported Wednesday that new-home sales fell
in September, some analysts think business investment in housing will actually
turn positive for the third quarter, the first time that's happened since the
final quarter of 2005.
So will sales of U.S.-made goods to customers overseas, helped by
improvements in economies in Asia, Europe and elsewhere. Business spending on
equipment and software also could turn positive for the first time in nearly
two years.
There’s wide variation in estimates for growth next year. The National
Association for Business Economics thinks growth will slow to a 2.4 percent
pace in the current October-December quarter. It expects a 2.5 percent growth
rate in the first three months of next year, although other economists believe
the pace will be closer to 1 percent.
To foster the recovery, the Fed is expected to keep a key bank lending
rate at record low near zero when it meets next week and probably will hold it
there into next year.
FPS
Comment
There’s undoubtedly some temporary boost to the economy by the
Government “stimulus” packages, Just look at the so called Cash for Clunkers
scheme and it’s sudden boost for auto sales.
It’s all a desperate attempt to shield the voters from economic reality,
at almost any price, or absurdity. Such as savy buyers snapping up golf carts
as they fall under subsidy rules for buying electric cars! Federal
credit gives from $4,200 to $5,500. Add on “Green” subsidies offered by states,
and it all adds up to just about a free cart. No more walking playing golf.
Brilliant boost to drug companies peddling drugs to deal with the ill health of
obesity!
Problem is, this funnelling of money is “robbing Peter to pay Paul”.
Peter being the US taxpayer, who will be left to pay the tab. This will have a
longer term weakening effect on the economy, as tax rates will have to stay
higher for longer. Or inflation is allowed to diminish real value of debt.
Economic growth is likely to be weak next year and suppressed in
following years, but looking on the bright side any growth is a big improvement
on the past two years.
Our tip on American investment is get your hands on repossessed property
before its supply dries up. At least, the market is being allowed, just
about, to do its savage cleansing of the property market, despite fine
words from Washington and the $8,000 tax credit. Whilst painful for the
unfortunate home owners who are being turned out, it will bring stability to
the housing market, possibly sooner than many expect.
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