An Artificial High

The bulls went ga-ga over Thursday’s “better-than-expected” data on U.S. gross domestic output. But if you look at how the figure was derived - which seems to be beyond the capabilities of most Wall Street strategists, TV pundits, and stock traders - you find that the “good news” should have had a big fat asterisk (*) next to it.

In “Thank You Cash for Clunkers,” for instance, EconomPic details a less-than-reassuring reason for the jump through the use of an eye-opening graphic:

Motor vehicles added a whopping 1.66% of the 3.5% growth in Q3 GDP. More specifically, motor vehicle output was up… wait for it… 157.6% on an annualized basis.

Source: BEA

In “Don’t Break Out the Champagne Yet: Cause for Concern in GDP,” the Wall Street Journal’s Real Time Economics blog relies on an old faithful - the written word - to dissect a so-called sign of recovery that is actually much less than it seems:

It’s great to be growing again, but two lines in Thursday’s GDP report have the potential to be temporary and warrant caution.

The first one is the critically important 3.4% pop in personal consumption expenditures, which was the biggest gain since the first quarter of 2007, when the housing bubble was still in the early stages of deflating. A very large chunk of that came from car sales, which accounted for a full percentage point of the overall increase in GDP for the quarter. The car sales increase was driven in large part by the temporary cash-for-clunkers program. After surging in July and August, retail car sales dropped 10.4% in September, suggesting the auto sector won’t provide such a big boost again any time soon.

The other piece was homebuilding, which rose for the first time since 2005. Home building didn’t just rise; it jumped 23.4%, which contributed another half percentage point to GDP growth. It is possible that a real upturn in housing has begun. But there might also be temporary factors at play, most notably the federal homebuyer’s tax credit. That’s got better prospects of being extended than cash-for-clunkers, but it won’t last forever. That, and still-large inventories of unsold homes in many markets, could be a weight on the housing recovery.

In short, Fed officials are surely pleased to see the GDP increase. But they’re likely to be a little wary of some of these temporary factors and reluctant to extrapolate above-trend growth from the numbers.

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