Today’s downward revision is far worse than it first appears. While third quarter GDP was revised down by a 0.6% (2.2% vs. 2.8% previously), the contribution from motor vehicle output (which was massively stimulated by Cash for Clunkers in a one-off fashion) remains enormous.
BEA GDP Release: Motor vehicle output added 1.45 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.
What this means is that Cash for Clunkers was an even larger factor than previously understood. As it stands, by a basic calculation without motor vehicle output, third quarter GDP would have been only 0.75%. That’s barely growing.
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Now obviously there might have been some degree of GDP contribution from motor vehicle output even if Cash for Clunkers hadn’t happened. Yet it would have been far less than 1.45%, look at Q2’s contribution noted above, it was only 0.2%.
Also, the contribution could have actually been negative (subtracting from GDP growth) if motor vehicle output had contracted without stimulus. (Which isn’t a wild scenario given the state of things for U.S. autos). And actually, in Q3 of 2008, the same year-ago period, motor vehicle output subtracted 0.15% from GDP growth according to the BEA. This means we could even be underestimating the boost from Cash for Clunkers here.
Thus no matter how you slice it precisely, a huge part of Q3 GDP came from inflated motor vehicle output, and a simple estimate is that GDP growth would have been only 0.75% sans Clunkers.
Thus third quarter GDP growth was mostly Cash for Clunkers.
Which means that from a political stand point, the administration must be pretty happy with the program. Economic data would be looking a lot worse without it.
Problem is, Cash for Clunkers was a one-off effect, and arguably economically-damaging in the long-term. Going forward, there’s risk that U.S. GDP could be weaker than economists expect if their forecasts are running off of Q3’s inflated 2.2% GDP statistic (Or worse, the previous 2.8% Q3 estimate).
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