GDP Rises, But Other Indicators Point Down

(MoneyWatch)  The U.S. economy grew in the third quarter and people are already celebrating the end of the worst recession in 70 years. Is such jubilation justified? I think not.

The Commerce Department report said GDP in the July to September period grew at an annual rate if 3.5 percent, ending four quarters of declines.

But if you look under the hood of those numbers, it becomes clear that two government subsidy programs, the Cash for Clunkers subsidy for replacing old cars with new, fuel-efficient models, and the $8,000 tax credit for first time home buyers, contributed significantly to that growth. In fact, if you remove the car sales boom, the economy would have grown at just 1.9 percent.

And while consumer spending increased at 3.4 percent rate, there is reason to believe this was a temporary spike. Karen Dynan, economic studies co-director at the Brookings Institution, told Congress that higher savings rates by the American consumer and less opportunity to borrow on houses meant that "the fundamental determinants of consumption will support only moderate growth in consumption over the next couple of years."

Dynan pointed out in her testimony that labor income such as average hours worked has been moving up quite sluggishly in recent quarters. "As conditions stand now," Dyson said, "the most likely outcome is for lackluster income growth over the next couple of years." Bear in mind that consumer spending accounts for 70 percent of the U.S. economy.

There are other darks clouds on the horizon. The Conference Board's consumer confidence index unexpectedly fell to 47.7 on October from 53.4 in September. Analysts had been predicting the October number would be 53.1. The number has to reach 90 before the economy is considered to be on a sound footing again.

Another measure of consumer confidence also fell in October. A Wall Street Journal/NBC poll found that 58 percent of Americans feel the economic slide still has a way to go, up from 52 percent in September. Only 29 percent felt that the economy had hit bottom.

Making matters worse, sales of newly built single family homes unexpectedly tumbled in September when everyone was expecting a rise. According to the latest government data, sales of new homes fell 3.6 percent, while analysts had been expecting an increase. This is likely a reflection of the fact that the $8,000 first time homebuyers tax credit is running out at the end of November and it takes more than a month to close on a house. There are plans in Congress to extend the credit, but this just shows how such subsidies distort a market.

House prices declined 11.3 percent from a year earlier in August, according to the S&P/Case-Shiller home price index. As recently as last December, the price declines had hit 18.5 percent. So a 11.3 decline in house prices was considered good news!

The home sales figures demonstrate that the home buyer tax credit has merely moved sales likely to happen in 2010 up to 2009, but once the credit expires, home sales will be weighed down again by the huge number of foreclosures taking place in many parts of the economy.

Is this too jaded a view? Perhaps. But there are a lot of things that could go wrong economically before they get better.