GDP Up 3.5%, But Don't Be Too Optimistic

US GDP grew by 3.5 percent in the third quarter (July through September) of 2009, buoyed by government stimulus, consumer demand and thawing in the housing market. That's a little better than the 3.3 percent analysts expected it to grow and much better than the 0.7 percent it fell in the second quarter of this year. In fact GDP grew by the fastest clip in exactly two years. So why is everybody so down on the economy?



It's unemployment, which is still expected to hit 10 percent since the job market lags other economic indicators. By various calculations, consumer spending amounts to between 40 and 70 percent of GDP. But you don't get back to regular consumer spending if 10 percent of the population is officially unemployed and another six percent is looking for more work than they have. Even the White House expects unemployment to stay in the mid-9's for another year. In a nutshell, that's why the Great Recession probably won't give way to a Great Recovery.

The quarter might yet be a fluke -- a catch-up quarter created by a mirage of turning inventory and government stimulus programs like August's Cash for Clunkers and the $8,000 home buyer's credit, which runs out this month. What's more, an additional 7000 people are falling off unemployment benefit rosters every day. The public's appetite for deficit spending might appear to be full, but so long as the economy is starving for consumer demand the government needs to keep feeding it money. As I've said a couple times this week (along with Megan McArdle and Bruce Bartlett) the best way to maximize the velocity of federal stimulus dollars is to give them to people who are most likely to spend their next marginal buck. It's (still) time to extend jobless benefits in every state.