Officially the US economy grew at a 3.5% pace in the third quarter which was a high water mark in the last two years. Many analysts and government officials conclude that we have established a floor in the economy and our path is upward from here. Is the growth real or fictional? Can it be sustained?
 

Consider the following:

Unemployment
Unemployment continues to be troublesome with “official” figures near 10%. Unofficially, if one considers those no longer actively searching for work, the figure is likely in the high teens.  A great web site for separating fact from fiction in government statistics is Shadow Government Statistics.  When unemployment (official or unofficial) is that high, people are not paying taxes, they are not active consumers, and they are relying on public support. This does not speak to an end of the recession or what we are experiencing which is more like a depression.  Recession became a euphemistic term for what was once called a depression.


Cash for Clunkers
The Cash for Clunkers program was successful in the sense that cars were sold. I highlighted the program in August describing its potential economic impact. I was highly critical on several points but in particular of the economic value destroyed as part of this program. Another article conducted a post-mortem on the program and explained the true cost to taxpayers. The infusion of government money did spur car sales for some manufacturers and certainly provided an economic boost in the third quarter. Upon withdrawal of the program, auto manufacturers reported a plunge in sales. This is not a surprise to this analyst since this stimulus was not requested by the market. It was only requested by the manufacturers one of which is largely owned by the US Government. There was no latent demand for new vehicles in the United States. There was only an attempt by government to resuscitate an ailing industry. It did not work.


Tax credit for first-time home buyers
An $8,000 tax credit for first-time home buyers accelerated spending on housing projects to the tune of more than 23% which was the largest increase in more than 20 years. Naturally, a new home requires furnishings so this and the appliance sector also contributed to further economic growth. It’s interesting that the government is providing a tax credit for home buyers when the supply of available homes is increasing sharply due to rising foreclosures. The natural decline in home prices should, if the market is so inclined, lead to additional purchases. The economic distortion caused by the tax credit could in fact lead some home builders to construct more homes. This is absolutely the last thing the residential housing market needs! Added to this is the anticipated release of millions of additional properties being held back by banks who are reluctant to realize portfolio losses on their mortgages. Consider also that government agencies are providing the foundation for most of the new mortgage originations in this country.  Since Uncle Sam is providing this backstop, the riskiness of the loan portfolios is actually increasing again due to lax lending standards. So while the tax credit had a temporary, palliative effect, the foundation of the housing market is no different and likely worsened long-term by government action.


The conclusion that Q3 marks the bottom of the recession is erroneous. Despite Treasury Secretary Geithner’s comments to a house committee, the economy is not recovering. What we witnessed is an economy temporarily bolstered by government intervention. The only reason the intervention was even possible was through the addition of borrowed money by the government. Borrowed money is not economic growth.
 

Jim Mosquera is the publisher of The Sentinel Economic and Financial Newsletter.