Money Matters - Simplified

Cash for Clunkers Boosts Q3 GDP Growth

The third quarter GDP result is out, and even though figures are not that impressive, they are definitely positive compared to the previous four negative quarters.

GDP growth in the third quarter stands at 2.2 percent, to which the maximum contribution came from the Cash for Clunkers program.

Also known as the Car Allowance Rebate System, the Cash for Clunkers is a $3 billion federal program given to the U.S. residents for purchase of new and efficient vehicles.

The program has so far added output of 1.45 percentage points to the third quarter GDP, which means before this addition, the GDP growth was a mere 0.75 percent!

Previously, the program was underestimated by various experts. But with the third quarter GDP results out, the program is getting its due recognition.

Goldman Sachs' Edward F. McKelvey said, “This was a much larger than normal revision for the third pass on a given quarter, knocking what once was a fairly robust 3.5% bounce down to a mediocre 2.2% (from 2.8% prior to this revision).”

Meanwhile, house purchases have been seen to soar quite high this year as compared to last year. However, the good news is not for long, as experts say the market still has a long way to recover.

"It’s a really good number, but we’re going to see really bad, ugly numbers soon," said Patrick Newport of IHS Global Insight.

Other than the success of this federal program, the GDP estimate also showed that investment and personal consumption expenditures have taken a sharp fall. It is predicted that the economy will recover only once there is more splurge from the consumer’s side.

“The question is once we get past this point, what does the economy look like?” asks Zach Pandl, an economist at Nomura Securities. “It remains the big question for the outlook.”

The next quarter's GDP figures are expected to be released on Jan. 29, 2010.