GDP report: The consumer steps up, but can it last?

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Some perspective on the details inside today’s government report on third-quarter gross domestic product, which showed that the economy grew at a 3.5% real annualized rate in the three months ended Sept. 30 -- the first advance since the second quarter of 2008:

--Bernard Baumohl, economist, Economic Outlook Group: Fueling this latest spurt in growth was consumer spending, which jumped at a 3.4% pace, the biggest increase since the first quarter of 2007. Much of the surge in spending should be attributed to the ‘cash for clunkers’ program and the $8,000 tax credit to first time homebuyers. But looking ahead, we believe that other non-governmental factors will help boost economic growth. First, this positive GDP report should provide a powerful psychological boost to Americans as they grow more confident the economic crisis is over. What this means is that 90% of Americans in the labor force who are working are eager to spend again. They’ve effectively shut down spending for more than two years, the longest such retrenchment since the Great Depression. During that time households have accumulated a considerable pile of savings. ... Some of that savings is already being used to fuel a fresh round of spending.

--Michael Woolfolk, currency strategist, Bank of New York Mellon: This was the strongest nominal GDP level since the fourth quarter of 2007, suggesting a return to the ‘old normal’ rather than the much discussed ‘new normal.’ While the [cash-for-clunkers] incentive program was a one-off, September retail sales and industrial production data indicate unexpected strength outside of the auto sector, which may provide added support to both personal consumption and gross private investment in the fourth quarter. The disappointment over government spending [growth] of 2.3% in the third quarter, from 6.7% in the second quarter, reinforces the prevailing view that the federal stimulus plan is rolling out on a more delayed basis than hoped. The positive here is that the weaker government spending was in the third quarter, the stronger it is likely to be in the fourth quarter.

--Chris Rupkey, economist, Bank of Tokyo-Mitsubishi: There are some surprising self-sustainable growth findings in today’s report. The consumer is back even if they are in debt up to their eyeballs. While it is true that cash-for-clunkers fueled a temporary spurt in auto sales that added 1.0 percentage point to the 3.5% [GDP growth], consumers also made more trips to the shops and malls and this non-auto consumer spending added about 1.5 percentage points to real GDP. Business capital spending has stopped declining which is good news. Perhaps business cut back their spending too close to the bone and will need to add more equipment and hopefully more workers in the quarters to come. The big surprise in today’s report is the turnaround in housing [residential fixed investment soared at a 23.4% annual rate]. Housing construction had dragged down real GDP growth by roughly 1 percentage point ever since 2006, but today construction has resumed and has added 0.5 percentage points to growth.

--David Resler, economist, Nomura Global Economics: The most important ‘surprise’ was the larger-than expected drop in inventories [down at a $131 billion rate in the quarter]. That implies that businesses are further along in their drive to realign stocks with current demand and suggests they must soon rely more heavily on current period production to satisfy on-going growth in demand. Score that as a positive for the outlook. But other details look less promising. ... State and local governments [where spending fell at a 1.1% pace] seem likely to face tougher cutbacks with no further boost from the fiscal stimulus while defense spending is likely to cool.

-- Tom Petruno