Economy grows in 3rd quarter, experts still worried

Posted on October 29, 2009

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We’ll get to why they’re worried in a second. The big headline is that the American economy grew at an annual rate of 3.5% between July and September. The report by the Commerce Department boosted world stock markets and was the biggest rate of growth since the third quarter of 2007.

But this news, encouraging on its face, must be tempered by cold realism. This rosy report came from strong performance in two sectors – durable goods and residential investment. Much of the growth there was fueled by government spending in the form of the Cash for Clunkers program that propped up the auto industry and an $8,000 tax credit for first time home buyers that has boosted home sales. Both of those programs cost the taxpayers money ($24,000 per incentivized sale in the case of Cash for Clunkers), both contribute to our national debt, and both of those programs are ending.

It’s telling that if you remove the output of the auto industry, the growth rate was only 1.9%. Granted, that’s still growth, but not quite the headline grabber form before. It leaves economists worried that the gains will be fleeting and insignificant, especially when you consider that business investment fell by 2.5%, indicating that the third quarter doesn’t reflect a fundamental strengthening of the economy but a flurry of spending by the government.

And while it may produce temporary benefits, the permanent damage to our debt is very real, which is yet another reason that individuals and nations cannot merely spend their way out of a recession.

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Posted in: News, Politics