By Rich Miller
Oct. 30 (Bloomberg) -- President Barack Obama and Federal Reserve Chairman Ben S. Bernanke built a bridge they anticipate will lead to a lasting U.S. economic recovery. It may end up being a bridge to nowhere they want to be.
The economy grew in the third quarter for the first time in more than a year, propelled by emergency programs to boost buying of cars and homes, according to Commerce Department figures released yesterday. Policy makers are betting those temporary measures will pave the way to a self-sustaining expansion as companies hire and consumers increase spending.
The risk is that the biggest government intrusion into the economy since World War II will leave the U.S. saddled with trillions of dollars of debt and not much to show for it. The worst financial crisis since the Great Depression may have shaken companies and consumers so much that their spending won’t be enough to replace federal support.
Third-quarter growth “was boosted by the various fiscal stimulus policies,” Harvard University professor Martin Feldstein said in an e-mail. “The danger remains of a serious slowdown after this and a possible double dip” of the economy in 2010, he said.
Consumer spending on cars and homes helped power the 3.5 percent annual pace of growth. Sales at Dearborn, Michigan-based Ford Motor Co. and Detroit-based General Motors Co. were spurred by the government’s “cash for clunkers” plan, which expired in August. Builders including Miami-based Lennar Corp. benefited from a first-time home-buyers tax credit that may be extended beyond its Nov. 30 expiration date.
Excluding sales, production and inventories of vehicles, the economy grew 1.9 percent last quarter, the Commerce Department said.
‘Rickety Bridge’
“It is a very rickety bridge, but it is a bridge,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.
Stock prices jumped after the stronger-than-anticipated GDP figures, with the Standard & Poor’s 500 Index finishing 2.3 percent higher yesterday at 1,066.11. The index is up 58 percent from its low for the year on March 9.
An improving U.S. and global economy helped companies from Amazon.com Inc. to Whirlpool Corp. exceed analysts’ earnings estimates last quarter. Profits at about 85 percent of the companies in the S&P 500 Index that have released results beat expectations, according to Bloomberg data. That marks the highest proportion in records going back to 1993.
Frankel Perspective
The U.S. economy probably hit its trough during the summer following four straight quarters of contraction, said Jeffrey Frankel, a Harvard University professor and member of the National Bureau of Economic Research’s Business Cycle Dating Committee.
The committee is responsible for deciding when recessions begin and end. Robert Hall, who heads the committee and is a professor at Stanford University in California, said in August it may take more than a year for the group to reach a decision.
Obama said yesterday the GDP report shows that “the steps we’ve taken have made a difference,” while acknowledging that the country has “a long way to go” before it recovers enough to bring down an unemployment rate at a 26-year high.
Most analysts anticipated that the government’s $787 billion stimulus program would have its biggest impact on growth in the second and third quarters of this year, Christina Romer, chair of Obama’s Council of Economic Advisers, told lawmakers last week.
“By mid-2010, fiscal stimulus will likely be contributing little to growth,” she added.
Rogoff Debt Warning
The $1.4 trillion budget deficit in the year ended on Sept. 30 -- which at 10 percent of GDP was the highest since World War II -- leaves the administration and Democratic lawmakers little room to add to what they’ve already done for the economy ahead of mid-term Congressional elections in November 2010.
“The debt is piling up,” Ken Rogoff, a Harvard University professor and former chief economist at the International Monetary Fund, said in a Bloomberg Radio interview two days ago. “We just don’t see” anything like it “outside wartime.”
While unemployment is likely to remain “severely elevated” for a while, any proposals for fresh government action to reduce it would need “rigorous evaluation” given the size of the budget deficit, Romer said.
Bernanke and his colleagues at the Fed have already begun to wind down some of their support for the economy. The central bank yesterday completed its purchases of $300 billion of Treasury securities under a program that was aimed at lowering borrowing costs.
FOMC Language
The Federal Open Market Committee may opt next week to soften its suggestion that short-term interest rates will stay at “exceptionally low levels” for an “extended period” in order to give it more flexibility to change policy in the future, Richard Berner, co-head of global economics for Morgan Stanley in New York, said in a report to clients on Oct. 26.
Policy makers, who have set a target of zero to 0.25 percent for their benchmark interest rate, will meet Nov. 3-4 to map monetary strategy.
As the central bank and the administration exit from their stimulus policies, it will be up to consumers and companies to fill the gap.
“The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government,” Kathleen Stephansen, chief economist at Aladdin Capital Holdings LLC in Stamford, Connecticut, said in an interview with Bloomberg Television.
End of ‘Clunkers’
Sales of cars and light trucks declined 23 percent in September after the “cash for clunkers” program ended, according to Autodata Corp. The seasonally adjusted annual sales rate for September was 9.22 million, compared with 12.6 million a year earlier.
The housing market has also shown signs of weakness amid uncertainty about whether the tax credit would be extended. Sales of new homes unexpectedly fell in September, dropping by 3.6 percent to a 402,000 annual pace. Senate Democrats have since reached an agreement to prolong the program.
Household spending is being held back as banks tighten lending standards after $1.7 trillion in writedowns and credit losses worldwide and as consumers seek to rebuild their finances.
Consumer credit fell in August for a seventh straight month, the longest series of declines since 1991.
“An ongoing balance-sheet adjustment in the household sector, combined with lingering labor market weakness, will weigh heavier on consumer spending than generally appreciated,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm, said in a note to clients yesterday.
More Job Losses
More than three-quarters of investors and analysts surveyed in a poll of Bloomberg subscribers across six continents late this month said they expect the U.S. unemployment rate to be 9.5 percent or higher a year from now. The rate in September was 9.8 percent.
Small businesses in the U.S. plan to keep reducing payrolls and inventories over the next three months on expectations sales will fall, according to a survey released on Oct. 13 by the Washington-based National Federation of Independent Business.
“The ‘job-generating machine’ is still in reverse,” William Dunkelberg, the group’s chief economist, said in a statement. “Sales are not picking up, so survival requires continuous attention to costs -- and labor costs loom large.”
The history of financial crises suggests that it will be a “long, slow haul” out of the recession, said Rogoff, author, along with Carmen Reinhart of the University of Maryland, of “This Time Is Different,” a study of such catastrophes.
“Things like unemployment, housing prices, they’re going to take a long time to come back,” Rogoff said. “We’ll probably have subpar growth” of around 2 percent “for a long time.”
To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net
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