Hold the singing

US GDP: Third-quarter US growth of 3.5 per cent looks like a bounce into recovery. But with "cash for clunkers” and government spending driving the numbers, it might as well be called Government Domestic Product. This approach caused a nice, but temporary, bounce in 1933. History may repeat itself.

The advance estimate of GDP growth is above the likely long-term US growth rate, so at first sight looks like a sign of a rebound. However, almost half of the growth represented additional motor vehicle output stimulated by the government-sponsored “cash for clunkers” programme. Another 18 per cent came from additional federal government spending. Strip those out and the economy grew by just over 1 per cent.

Moreover, a further 28 per cent of growth simply represented a turn from inventory de-stocking to modest re-stocking - a trend which may not last. On a positive note: residential investment, which had declined in every quarter since 2005, accounted for 15 per cent of the GDP advance. But here, too, the government played a role with its first-time home buyer tax credit, which will soon end.

All those new cars had to be paid for somehow, and those sales resulted in a decline in the consumer savings rate, from 4.9 per cent in the second quarter to 3.3 per cent. Personal disposable income actually declined, by 0.8 per cent during the quarter, as a further 768,000 jobs vanished from the economy. As net exports also declined, the US economy took a substantial step back towards its zero saving, huge trade deficit imbalances of 2007, even though it remains far below full employment.

When Franklin Roosevelt came to office in 1933, on a slogan of “Happy days are here again”, he engaged in substantial fiscal and monetary stimulus, increasing federal spending from 3.1 per cent of GDP in 1932 to 5 per cent in 1934 and devaluing the dollar by 40 per cent against gold. This brought real GDP increases of 11 per cent in 1934 and 9 per cent in 1935. However, the economy did not return to full employment. Consequently a second recession followed in 1937, one that was deeper than any post-war downturn including the current one.

Given the current – and rising - imbalances in monetary and fiscal policy, and the re-emerging deficits in savings and trade, it appears too early to declare the downturn over. Government-led recovery, such as that embodied by the third quarter’s apparent bounce, may yet prove to have some drawbacks of its own.