In the 1930s, a favourite movie scene would see someone run out in the middle of the road, throw up their hands, look towards a camera and say, “Hey Joe, the depression’s over!” The US third quarter GDP definitively proclaims the end of the recent long US recession.

On 27 October, the Economics Department of RBS Morgans headed by Michael Knox previewed the White House’s view of the economy, expressed in the testimony of the chair of the White House Council of Economic Advisers, Christina Romer, who thought that third quarter GDP might be 3.2 per cent. The actual result was a better than anticipated 3.5 per cent. The composition of the quarterly growth is shown below.

Per cent contributions to change in real gross domestic product (third quarter 2009, Source: Bureau of Economic Analysis)

  • Gross domestic product: 3.5 per cent
  • Personal consumption: 2.36 per cent
  • Gross private domestic investment: 1.22 per cent
  • Federal government: 0.62 per cent
  • State and local government: -0.14 per cent
  • Net exports: -0.53 per cent.

2.36 per cent of the growth achieved was provided by an increase in personal consumption. Motor vehicles alone generated an increase of 1.01 per cent of GDP. Still, the increase in consumption was broadly based. There were increases in recreational goods and vehicles, non-durable goods and food and beverages consumption. Broad based consumption increases have returned to the US economy.

It was also particularly heartening to see a recovery in investment. Gross private domestic investment contributed 1.22 per cent of the quarterly number. Of this, the largest single section was the recovery in residential investment. In the second quarter, residential investment reduced GDP by 0.67 per cent. In the third quarter, it added 0.53 per cent to GDP.

This increase in residential investment was supported by an increase in investment in equipment and software. This added 0.31 per cent to GDP. A recovery in investment in equipment and software is very beneficial because it tends to be a leading indicator of employment growth. This suggests that the US economy will move from a period of employment losses to a period of moderate employment gains. A combination of a 2.36 per cent increase in personal consumption plus a 1.22 per cent increase in gross private domestic investment adds up to 3.58 per cent or more than the quarterly increase in GDP of 3.5 per cent.

What then happened to the much-vaunted positive effect of fiscal stimulus?

What happened to fiscal stimulus?

In our review of 27 October, we noted that the Council of Economic Advisors had suggested that the fiscal stimulus of 1.4 per cent of GDP would add 3.6 per cent annualised to the third quarter growth rate. We compared this to the much lower estimate of the National Association of Business Economists (NABE), which suggested that the fiscal stimulus would add only 0.8 per cent to third quarter GDP. Which of these two estimates was correct? The National Accounts tell us that government consumption expenditures and gross investment for the federal sector added only 0.62 per cent to GDP in the third quarter. This is close to the NABE estimate and far, far lower than the Whitehouse estimate.

The story doesn’t end there. The National Accounts tell us that state and local governments actually subtracted 0.14 per cent from GDP. The deficit on net exports of goods and services subtracted another 0.53 per cent. These negative numbers total 0.67 per cent. This means that the net effect of federal stimulus was only large enough to cancel out the negative effects of state governments and the deficit on real net exports.

Still, 3.5 per cent is a very good quarterly number. Is this kind of growth rate sustainable? Sadly not. The reading on the US economy provided by the Chicago Fed National Activity Indicator was released earlier this week. It is based on a much broader range of economic indicators than just GDP. The three-month moving average of the Chicago Fed National Activity Index for September tells us that the US economy is growing at 0.63 of a standard error below trend. This is slightly higher than the recession level of -0.7 of a standard error. This means that the recession is over, but that the US economy is growing at a slower rate than the GDP numbers suggest.

We expect GDP growth numbers in coming quarters to slow to trend growth rate for US GDP of around 2.5 per cent.


The recession is over. The US growth rate of 3.5 per cent annualised for the third quarter of 2009 declares the recession’s end. The recovering growth was made possible by a surge of 2.36 per cent of GDP from personal consumption and 1.22 per cent from gross private domestic investment. The federal stimulus programme added a modest 0.62 per cent to GDP. This only counter-balanced the negative effects of falling state and local government spending and negative real net exports.

Fiscal stimulus can provide modest support to a weak economy. Fiscal stimulus cannot provide recovery; only consumers and investors can do that.

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