Economic growth roared back at a 3.5 percent pace in the summer quarter, thanks to two powerful but relatively inexpensive stimulus measures targeted at consumers. But the vast majority of the $787 billion stimulus that went toward funding government programs had a more muted impact, according to economic figures released Thursday.
Two incentive programs aimed at spurring housing and auto sales had a visible and potent effect in sparking a 3.4 percent jump in consumer spending, the strongest in more than two years, and a dramatic comeback for manufacturing, according to the Commerce Department's report on gross domestic product.
The "cash for clunkers" trade-in program for gas-guzzlers inspired a 22.3 percent surge in purchases of big-ticket goods - primarily autos - while the department said the ramping up of auto production to meet demand for new fuel-efficient cars accounted for 1.66 percentage points, or nearly half, of the growth registered during the July-September quarter.
Similarly, the $8,000 tax credit Congress provided for first-time homebuyers helped spark a 23.4 percent spike in housing construction, which had plummeted by 23.3 percent during the spring quarter, as builders broke ground on new homes in hopes of serving buyers taking advantage of the credit. Economists said the housing revival accounts for nearly a third of the 3.5 percent growth registered in the quarter.
While the auto and housing programs provided a clear impetus to the economy, the effect of other government stimulus provisions was muted and appeared to be tailing off after a spurt in the spring, when the economy overall declined by 0.7 percent.
Federal spending increased by 7.9 percent in the summer - much of that on defense - after surging by 11.4 percent in the spring, while state and local spending fell by 1.1 percent after increasing by 3.9 percent right after the stimulus funds were released by the federal government in March.
The lion's share of the record $787 billion stimulus package has been directed to federal, state and local spending programs primarily on education, health care, green energy and infrastructure. A large portion also was funneled into expanded benefits for the unemployed, including assistance in helping jobless people maintain their health insurance coverage.
"The longest recession since 1947 is over. Uncle Sam was the primary driver behind the economic turnaround," said Sung Won Sohn, economics professor at California State University Channel Islands. He credited the $3 billion clunkers program, which was enacted months after the stimulus package and expired in late August, as well as the $15 billion homebuyers' credit, added to the stimulus package at the last minute and due to expire Nov. 30.
But while the government deserves applause for belatedly enacting incentives that helped spawn growth, the economy faces trouble as the sales programs come to an end because the fundamental financial dilemmas facing consumers and businesses have not changed, he said.
"With the stimulus from the government programs diminishing, the weakness of the private sector points to the possibility of a double-dip recession later in 2010," he said.
Congress and the Obama administration are moving to extend the housing tax credit amid signs that the big push the economy got from the housing and auto programs is now fizzling. After hesitating over the potential cost of extending the housing credit, Treasury Secretary Timothy F. Geithner announced Thursday that the administration would support a "limited" extension as long as Congress enacts safeguards against fraudulent claims.
Senate leaders announced they have agreed on a five-month extension and expansion of the credit so that some existing homeowners can use it, at a cost of about $10 billion.
Meanwhile, debate continued among Republicans, Democrats and economists over the contribution of the rest of the stimulus package.
Republicans continued their drumbeat of criticism that the enormous spending plan has failed to stem widespread job losses. They point to an investigation by the Associated Press that found the administration's claim of 30,000 job gains from the package so far was inflated.
"Any positive signs for our economy are welcome, but a jobless recovery is not what the American people were promised," said House Minority Leader John A. Boehner, Ohio Republican.
Christina Romer, chairman of the White House Council of Economic Advisers, acknowledged the problem with joblessness but insisted that the stimulus arrested a steep downturn of the economy in the winter, when it fell at a 6.4 percent rate, and helped produce the most dramatic swing from recession to growth seen since 1980.
Without it, the economy "would have risen little, if at all, this past quarter," she said. But she also conceded that the bulk of the impact from spending on state and federal programs was seen in the spring and summer quarters, and its effect will wane in the future.
Josh Bivens, analyst with the Economic Policy Institute, a labor-backed think tank, said the stimulus bill's expansion of unemployment benefits, tax cuts for the middle class and one-time payments of $250 to seniors and disabled people all helped to produce the revival of consumer spending seen in the summer.
He noted that wages and other forms of income have been falling since the recession began, and the government transfers were essential to maintaining consumers' purchasing power.
"Consumer spending is buoyed largely by public spending and relief," he said. Without it, "it is easy to imagine consumer spending plunging much farther than it has."
Harm Bandholz, economist with Unicredit Markets, said the increase in federal spending was a minor contributor to growth in the summer. He added that a continuing stream of stimulus spending in coming quarters could prove critical to offsetting a widely expected drop in consumer spending as consumers once again sink under the weight of high unemployment and debt.
Peter Schiff, president of Euro Pacific Capital, questioned the wisdom of even the housing and auto sales incentives, saying the boon for the economy was unsustainable because it was paid for with more consumer and government debt, which is already at dangerous levels.
"The government's economic stimulus programs have created some short-term gain in exchange for severe long-term pain," he said.
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