Economy is kick-started, but can it motor ahead?

Network News

X Profile
View More Activity
By Neil Irwin
Washington Post Staff Writer
Wednesday, October 28, 2009

Over the past year, the U.S. government has thrown almost every tool at its disposal toward making the economy grow again. And it has worked, at least for now.

The trillion-dollar question for the economy now is: What will happen when those government supports are gone? While the government has successfully jump-started the U.S. economy, there are emerging signs that its engine still isn't running very well, and may even sputter out.

The government has deployed about half of $787 billion in spending and tax cuts that were part of its stimulus package. It has executed the "Cash for Clunkers" program that boosted auto sales over the summer, and it has taken a wide range of steps to support the housing market. The Federal Reserve, besides cutting its target interest rate to nearly zero, has committed $1.75 trillion to unconventional programs meant to reduce interest rates.

The combined results of all those efforts will be on display Thursday, when the Commerce Department reports on gross domestic product for the July through September quarter. Economists expect that broadest measure of economic activity to have risen at a 3 percent annual rate, compared with a 6.4 percent drop in the first quarter, and forecasters expect growth to continue through year's end.

"The patient is out of intensive care, but is still highly medicated," said David Shulman, senior economist at the UCLA Anderson Forecast. "So you don't know how much of this growth is driven by short-term stimulus and how much of it is self-sustaining. My guess is this is going to be the best quarter of growth for a long time."

Besides the government programs, a major factor in the rebound is that companies have ramped up operations to restore inventories depleted during the recession -- although that boost to growth is also expected to wane in the quarters ahead.

The risk in the current crisis is that the structural changes occurring in the economy are so great that they will take far longer to play out than the government can maintain policies to support growth. Some remedies, such as the housing tax credit, may even serve to delay those structural adjustments.

The idea behind the government interventions was to boost economic activity when it otherwise would be far below its potential, supporting demand for goods and services of all types and helping instill confidence that the nation is not entering a downward economic spiral. Having bridged that down period, the economy should begin to improve on its own momentum as businesses ramp up production and begin hiring and making investments again.

That's the idea, anyway. But fundamental changes are occurring in the economy that could slow growth for some time. The United States needs to shift away from consumption and home building and toward business investment and exports. Meanwhile, whole industries from financial services to auto manufacturing to news media are being fundamentally remade.

Various elements of the government's efforts to prop up the economy will likely expire before those transitions are done. Cash for Clunkers is already over, having boosted auto sales during the summer but resulting in a 35 percent drop in the rate of sales from August to September.

"It may have pulled forward some sales that would have happened later, and led some people who to buy new cars who would have bought used," said Chris Hopson, an auto industry analyst at IHS Global Insight. "But in terms of lasting impact on the way the industry does business, we don't see there being much."

An $8,000 tax credit for first-time home buyers, which was part of the February stimulus package, is scheduled to expire Nov. 30, although Congress is moving to extend it into the spring. Other programs to support housing include help for people facing foreclosure and an expansion of Federal Housing Administration insured loans.


CONTINUED     1        >

© 2009 The Washington Post Company

Network News

X My Profile
View More Activity