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Many factors to determine if growth sustainable
By Martin Crutsinger
Associated Press
Published on Sunday, Nov 08, 2009
WASHINGTON: Can growth in the gross domestic product, the broadest measure of the nation's economy, be sustained?
That depends on what caused the components of GDP — consumer spending and business investment — to move up or down, and whether the growth was heavily dependent on government programs that are going away.
The recently announced 3.5 percent GDP growth rate in the July-to-September quarter represented the first positive growth in the figure after four consecutive quarters of declines. It was the largest gain in two years. But the concern is that this growth will falter given the huge problems still facing households.
Here is a look at the key components of GDP, showing how much each contributed or subtracted from growth in the third quarter, along with forecasts for how they will perform going forward.
Consumer spending
• How much it grew: 3.4 percent rate in third quarter, best showing since early 2007.
• Contribution to overall GDP: 2.36 percentage points of the 3.5 percent third-quarter growth in GDP came from consumer spending. Car sales alone represented 1 percentage point of total growth, reflecting the success of the government's Cash for Clunkers program.
• Prospects: This is the biggest question facing the fledgling recovery, given that consumer spending represents 70 percent of total economic activity. Can consumers keep spending with unemployment at a 26-year high of 9.8 percent and expected to keep rising until next summer?
Economists are split. Some think the end of the Cash for Clunkers program in late August and the waning impact of various one-time tax cuts and individual payments from the $787 billion stimulus program will send consumer spending back into negative territory. That would represent a big blow to a recovery.
Other analysts believe there is enough momentum that consumer spending will keep growing in the months ahead, just not as rapidly as in the third quarter.
Private investment
• How much it grew: 11.5 percent rate in third quarter, after declining for seven consecutive quarters.
• Contribution to overall GDP: 1.22 percentage points of the 3.5 percent GDP growth came from investment, with nearly half that strength coming from a surge in residential construction, an area that had been plunging since 2006. Business spending on computers and other equipment showed gains but spending on commercial structures such as office buildings and shopping centers continued to decline.
• Prospects: Economists believe commercial real estate will continue to suffer, given high office vacancy rates and the difficulty developers are having getting new financing because of rising loan defaults on commercial mortgages. Housing is expected to keep rising, a forecast that is based in part on the expectation that Congress will extend and expand the current $8,000 tax credit for first-time home buyers, which is scheduled to expire on Nov. 30.
Another potentially good sign for economic growth: Businesses are expected to begin rebuilding inventories that have been drawn down sharply during the recession.
Trade
• Increase in deficit: Widened by $17.9 billion in third quarter compared to second quarter.
• Contribution to overall GDP: Reduced GDP by 0.53 percentage points in third quarter.
• Prospects: Economists believe that trade, which had been one of the few areas of strength in the past year, will be basically neutral in the coming quarters as the growth in exports will be offset by gains in imports. The gains in exports, however, are expected to help certain industries.
Government spending
• How much it grew: 2.3 percent rate in third quarter, slowing from a 6.3 percent growth rate in second quarter.
• Contribution to overall GDP: 0.48 percentage points of GDP growth in third quarter came from the increase in government spending.
• Prospects: All the strength in third-quarter government spending came from a 7.9 percent rise in spending at the federal level, reflecting in part the boost from the stimulus program. That offset a 1.1 percent drop in state and local spending, where budgets have been hard hit by the recession. The expectation is that the stimulus program, which is helping states weather the recession, will keep government spending growing in coming quarters.
WASHINGTON: Can growth in the gross domestic product, the broadest measure of the nation's economy, be sustained?
That depends on what caused the components of GDP — consumer spending and business investment — to move up or down, and whether the growth was heavily dependent on government programs that are going away.
The recently announced 3.5 percent GDP growth rate in the July-to-September quarter represented the first positive growth in the figure after four consecutive quarters of declines. It was the largest gain in two years. But the concern is that this growth will falter given the huge problems still facing households.
Here is a look at the key components of GDP, showing how much each contributed or subtracted from growth in the third quarter, along with forecasts for how they will perform going forward.
Consumer spending
• How much it grew: 3.4 percent rate in third quarter, best showing since early 2007.
• Contribution to overall GDP: 2.36 percentage points of the 3.5 percent third-quarter growth in GDP came from consumer spending. Car sales alone represented 1 percentage point of total growth, reflecting the success of the government's Cash for Clunkers program.
• Prospects: This is the biggest question facing the fledgling recovery, given that consumer spending represents 70 percent of total economic activity. Can consumers keep spending with unemployment at a 26-year high of 9.8 percent and expected to keep rising until next summer?
Economists are split. Some think the end of the Cash for Clunkers program in late August and the waning impact of various one-time tax cuts and individual payments from the $787 billion stimulus program will send consumer spending back into negative territory. That would represent a big blow to a recovery.
Other analysts believe there is enough momentum that consumer spending will keep growing in the months ahead, just not as rapidly as in the third quarter.
Private investment
• How much it grew: 11.5 percent rate in third quarter, after declining for seven consecutive quarters.
• Contribution to overall GDP: 1.22 percentage points of the 3.5 percent GDP growth came from investment, with nearly half that strength coming from a surge in residential construction, an area that had been plunging since 2006. Business spending on computers and other equipment showed gains but spending on commercial structures such as office buildings and shopping centers continued to decline.
• Prospects: Economists believe commercial real estate will continue to suffer, given high office vacancy rates and the difficulty developers are having getting new financing because of rising loan defaults on commercial mortgages. Housing is expected to keep rising, a forecast that is based in part on the expectation that Congress will extend and expand the current $8,000 tax credit for first-time home buyers, which is scheduled to expire on Nov. 30.
Another potentially good sign for economic growth: Businesses are expected to begin rebuilding inventories that have been drawn down sharply during the recession.
Trade
• Increase in deficit: Widened by $17.9 billion in third quarter compared to second quarter.
• Contribution to overall GDP: Reduced GDP by 0.53 percentage points in third quarter.
• Prospects: Economists believe that trade, which had been one of the few areas of strength in the past year, will be basically neutral in the coming quarters as the growth in exports will be offset by gains in imports. The gains in exports, however, are expected to help certain industries.
Government spending
• How much it grew: 2.3 percent rate in third quarter, slowing from a 6.3 percent growth rate in second quarter.
• Contribution to overall GDP: 0.48 percentage points of GDP growth in third quarter came from the increase in government spending.
• Prospects: All the strength in third-quarter government spending came from a 7.9 percent rise in spending at the federal level, reflecting in part the boost from the stimulus program. That offset a 1.1 percent drop in state and local spending, where budgets have been hard hit by the recession. The expectation is that the stimulus program, which is helping states weather the recession, will keep government spending growing in coming quarters.
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