The Commerce Department announced GDP growth of 3.5% for the third quarter, putting an exclamation point to the end of the recession. The power behind the improvement was, as usual, the consumer who has played Lazarus these last two months. He is a consumer who spends even with rising unemployment. But, he is also a consumer who spends because of extraordinary deals on expensive goods like cars and incentives for new home buyers. The one troubling part of the GDP news as far as pessimistic economists were concerned is that the $787 billion government stimulus package was at the heart of too much of the GDP increase. That stimulus will be going away and no one knows how much of a financial crutch it has been.
GDP improvement is likely to be much less impressive in the current quarter. Unemployment will hit 10% before the end of the year, and may be there already. Holiday shopping is expected to be abysmal. That alone will badly hurt economic growth.
The 2010 economy is another matter entirely. It appears that the government will extend unemployment benefits, which will keep hundreds of thousands of people from becoming essentially destitute. The homebuyer credit is likely to get an extension through April. The Treasury is doing small but important things like possibly putting more capital into GMAC so that GM customers will find it easier to finance a car purchase.
The effects of the stimulus package are supposed to be felt primarily in 2010. That is what the Administration has said, and if it is so, the results of the influx of spending should be similar to what there were in the third quarter of this year. In addition to stimulus effects, the prospects of businesses that rely on exports should be helped by the dollar, if its value does not radically change.
There is still some promise that the stock market will continue to advance which will replace some of the hundreds of billions of dollars that investors lost between the middle of 2008 and March of 2009. Investors with larger brokerage accounts are more likely to be robust consumers. The lessons of poverty and frugality build during the year’s awful downturn may not last long.
Above all else, both businesses and individuals know that 2011 will be a year of large tax increases. That will be hard for Congress to change even if it is politically expedient to do so a year from now as the mid-term election approaches. The deficit will still be growing and there will not be much hope of an immediate increase of receipts to the IRS to help off-set that. The national debt will be on its way to $14 trillion or $15 trillion. Cutting taxes will be tough to sell, even to people who would like to pay less to the government.
The tax increases of 2011 will move a lot of personal income and business activity forward into the latter part of next year. Anyone who can take part of a salary or a bonus in the last quarter of 2010 will. Any business that can move a taxable event from the first quarter of 2011 to 2010 will take that option. GDP could be helped by a percentage point of more. A GDP growth rate that might normally be 4% in 2010 could be artificially pushed up to 5% or 6%. Businesses might even begin to hire people next year in the anticipation of a temporary burst of demand as 2010 wears on.
No one should be shocked if GDP moves up 6% next year, even if that number seems unattainable now. It seems like a century ago, but GDP improved markedly after the 1980 to 1982 recession. Economic growth in the last quarter of 1983 was 7.8% above the rate of the third quarter of 1982.
The harsh lessons of rebuilding an economy that has been shaken to its foundations by recession is that a sharp rise in taxes a year-and-a –half later, when unemployment may still be over 8%, should cause another awful incident of consumer despair and lower business investments.
The beginning of 2011 is a long way off, perhaps too far off to worry about. The last two years have been a nightmare. No one may want to bother to look beyond a foreshortened horizon.
Douglas A. McIntyre
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