Cash for Clunkers Drives 3rd Quarter GDP Growth
The defense share of GDP is at its highest level since the first quarter of 1993.
GDP grew at a 3.5 percent annual rate in the 3rd quarter, driven by a 22.4 percent jump in car sales, the result of the Cash for Clunkers (C4C) program. This increase in car sales accounted for 42.0 percent of the growth in the quarter. Consumption as a whole, which grew at a 3.4 percent annual rate, added 2.36 percentage points to growth. Other components making large contributions to growth were inventories, which added 0.94 percentage points; national defense, which added 0.45 percentage points; and residential construction, which added 0.53 percentage points, its first positive number since the fourth quarter of 2005.
The surge in car buying will be reversed in the current quarter, as the main effect of the C4C was to pull car purchases forward. As a result, the auto sector will be a substantial drag on growth in the current quarter. Apart from the auto sector, consumption grew at a 1.0 percent annual rate. With disposable income falling due to continued job losses and declining hourly wages, and the reversal of the surge in car sales, consumption growth will almost certainly be negative in the 4th quarter.
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