Federal National Mortgage Assoc
In early November the talking heads were breathlessly reporting the economy “grew” by 3.5% in the third quarter…that the economy was now recovering. The end of economic contraction also signaled the end of the recession that began in the fourth quarter of 2007. And they attributed much of this growth to the pick up in auto sales. To read the full government report, go to www.bea.gov.
The index of leading economic indicators, which has been positive for seven months now, is also suggesting the economy is in recovery.
So, is it true? Are we on a sustainable growth path now? Does this latest government release about the economy mean the worst is behind us? Does the Index of Leading Economic Indicators tell us the same thing?
Well, let’s look at the reports and see where the growth came from. Maybe that will give us some answers.
To start, the 3rd quarter’s growth rate has since been revised downward to 2.8%. And the following schedule shows the contribution to growth from the various sources in our economy.
The contributions to growth were as follows:
I appreciate this data table is a little busy, but it is important in order to understand the real nature of what some are calling a recovery. You will note the single largest contribution to the third quarter economic growth was inventory restocking. In my mind, putting stuff back on empty shelves is not growth. It is simply the reverse of the massive and aggressive destocking we saw in the fourth quarter of 2008.
So, if we take out restocking, the growth rate slips to 1.9%. Let’s also remove defense spending and healthcare, which are not growth items. After all, supporting our troops in Iraq, Afghanistan and around the world should not be considered economic growth. And more healthcare for an aging population should not be considered new growth.
If we eliminate defense and healthcare, growth is now reduced down to just 1.1%. But a major contributor to this remaining growth is vehicle sales. Now let’s look a little deeper into this item.
Month to month auto sales are highly volatile and seasonal. So while we did have the idiotic “Cash for Clunkers” government giveaway program that kick started some sales in the third quarter, there are two other factors that are more significant. Pent up demand has been growing and the Cash for Clunkers was just the catalyst.
Pent up demand is from the increasing average age of cars on the road, now over 9 years old. In addition, interest rates on car loans are near half of what they were in early 2007. The average car now has over 100,000 miles on it and interest rates on new car loans are low. Underwriting standards, at 10% down payment, have not changed over the past several years and average prices have not changed much and are at just under ,000.
Most of us are accustomed to seeing the total numbers of cars purchased,