Don’t Get Too Excited about Q3 GDP Figures

Yesterday with great fanfare, President Obama’s economic team announced that the U.S. economy Gross Domestic Product (GDP) rose 3.5% in the third quarter of this year, ending September 30, 2009. Obama himself stated that the economy had “come a long way” since the beginning of his presidency. Others on his team went further, indicating the growth in GDP is proof that the recession has ended. If you are a small business owner on Main Street you probably rolled your eyes like I did when I saw the positive “spin” on TV last night.

 

While it is good news that the GDP rose, it is important to understand the impact of two artificial stimuli that dramatically affected the rosy news. It is also important to consider how small privately held businesses did for the quarter since small business creates nearly 50% of all GDP.

 

Out of the 3.5% increase in GDP, nearly half of it came from two government stimulus projects that were targeted at consumers. Cash for Clunkers was the wildly successful program that allowed U.S. consumers to trade in their less energy efficient cars for shiny new ones. What is yet to be seen is whether Cash for Clunkers kills the sale of autos during the 4^th quarter. It is certainly possible that many people who would have made a vehicle purchase in the forth quarter did so in the third because of Cash for Clunkers.

 

The second big artificial stimulus affecting the high GDP was the federal government program offering first time homebuyers an $8,000 tax credit. Home sales were significantly up for the quarter and those sales affected the GDP number. There is effort in congress right now to extend the home buying credit past the December 31 deadline, so that stimulus may continue.

 

So if you are an automaker or selling real estate, you have a temporary reason to be happy.

 

Several notable economists not tied to the Obama administration estimate that the affect of the above mentioned artificial stimulus accounted for about one half of the total GDP increase. If that is true, the forth quarter ending December 31, 2009 should be substantially weaker, and maybe even show a negative GDP growth rate. In my way of thinking to see if you have a trend you need at least three data points that line up, so it may be the middle of 2010 before we really know whether the end of the recession occurred over the summer as some on TV suggested last night.

 

According to Sageworks, Inc. a company that tracks real time financial data for private U.S. companies, the 3^rd quarter was not nearly so rosy.

 

The comparison chart below shows the industrial segments (taken from private company data) for the third quarters of 2007, 2008, and 2009. These industrial segments of our economy did not grow over last year

 

2009Q3 Selected Industry Sales Changes

Data provided by Sageworks, Inc.

 

It has historically been private investment, private industry, and small business that have taken the U.S. economy out of prior recessions, not government stimulation. The third quarter economic data may show some improvement in private industry contribution to the improvement of the GDP, but since the impact of the stimulus money injected into the economy was for the most part a one time event, one should not become overly optimistic that the worst is over.

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Sam Thacker is a partner in Austin Texas based Business Finance Solutions.

You may contact Sam directly at: sam@lesliethacker.com

or follow him on Twitter: SMBfinance

 

EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.