By Christian E. Weller
RISMEDIA, October 30, 2009—There is light at the end of the tunnel, and the American Recovery and Reinvestment Act got the economic engine closer to that light. The economy grew at an annual inflation-adjusted rate of 3.5% in the third quarter of 2009, the Bureau of Economic Analysis recently reported. This is the first time that the economy has expanded after five-quarters of declines, and it is the strongest quarterly growth rate since the third quarter of 2007.
This is the clearest sign to date that the economic contraction and the recession ended some time this summer. Public policy has had a strong hand in getting the economy back from the brink of disaster and moving the economy into positive territory. Additional public policy attention is needed, however, to get the labor market unclogged, jobs growing, and the unemployment rate falling in the near future, after large-scale policy efforts did the same for financial markets and economic production.
The consumer is back. Consumption spending increased by 3.4% this quarter, its strongest growth since the first quarter of 2007. This was largely due to a 22.3% jump in spending on consumer durables, such as cars. Car sales jumped 56.4% in the third quarter of 2009 with the help of the additional incentives, known as “Cash for Clunkers.” Consumer spending on a number of other items also increased at a healthy rate. Spending on recreational goods grew by 13.8%, furniture spending by 6.5%, and other goods by a respectable 6.2%. Food spending, a non-durable goods item, rose by 5.0% in the third quarter.
There are encouraging signs, based on one quarter of data that the housing slump seems to have come to an end. The housing market expanded for the first time in almost four years. Spending on new homes increased by a strong 23.4% in the third quarter, the first increase since the fourth quarter of 2005. This is also the largest gain in more than two decades since the second quarter of 1986. The increase in spending on housing was aided by price declines during the previous years and low interest rates and the momentum in the housing market could thus very well last.
Much of the momentum in consumer spending came from increased after-tax income in the prior quarters. Families had received tax cuts, additional Social Security benefits, and more unemployment insurance benefits since early spring. They spent some of this money in the third quarter, thus contributing to strong economic growth. The personal saving rate fell to 3.3% in the third quarter of 2009, down from 4.9% in the second quarter, and its lowest level since the second quarter of 2008.
About the author
Christian E. Weller is Associate Professor, Department of Public Policy and Public Affairs, University of Massachusetts-Boston, and a Senior Fellow at the Center for American Progress.
For more information, visit www.americanprogress.org.
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