Market Talk

It's hard to cheer when we're all looking for work.

If there’s one thing folks should learn from last week’s GDP reading, it’s that a better-than-expected headline number must be taken with a grain of salt.

GDP’s 3.5% rise in 3Q is a welcome stat and is certainly better than a shrinking economy. But it’s still not nearly enough growth to offset the troubled labor market, Paul Krugman writes at Conscience of a Liberal. (Editor’s note: we’ve got Krugman on the brain here today, obviously.)

The unemployment rate currently sits at 9.8% and there’s a good chance it could hit double-digits when the monthly nonfarm payroll data is released Friday. While Wall Street might have already “priced in” double-digit unemployment, it’s a hard to see a real recovery occurring when one out of six Americans are either unemployed or underemployed.

If the economy grows at a similar 3.5% rate over the next eight years, unemployment would likely from 9.8% to a still “uncomfortably high” 6.3%, Krugman says.

“It would take us around a decade to reach more or less full employment,” Krugman says. “We need much faster growth.”

Here’s an even scarier thought. Stimulus efforts like cash-for-clunkers and the first-time home buyer tax credit played a crucial role in boosting consumer spending, which helped lift GDP in 3Q. But there’s no evidence showing that GDP growth rate is sustainable.

Auto sales have already reverted back to pre-clunker days, proving the consumer has no interest in purchasing big-time items unless there’s a significant government subsidy involved.

Still, the tax credit is boosting demand in the near-term, as seen in today’s housing data. September pending home sales rose 6.1% from a month ago, well above economists expectations. Some buyers probably rushed to sign contracts in order to qualify for the $8,000 tax credit, says Miller Tabak equity strategist Peter Boockvar.

“October will likely see a hangover,” he notes.

Of course with the likely tax-credit extension, sales may pick up again. But it’ll have to happen during a seasonally slower time of year, he adds. And once the tax credit actually does end, the housing industry will be forced to revert to natural supply and demand dynamics.

“Only then will we know the real status of the industry,” Boockvar says.

Additionally, some recent reports are further undermining the value of cash-for-clunkers. Edmunds.com said the program added only 125,000 car sales, and cost taxpayers $24,000 for each of them.

“So cash-for-clunkers mostly just turned out to be a gift from the government to people who happened to be in the market for a new car at the right time,” economist Steven Levitt writes at the Freakonomics blog, noting this shouldn’t surprise anyone. “It is relatively easy to move around the timing of when someone purchases a durable good, but much harder to affect whether they buy a durable good or not.”

Where does this leave the economy? Not in a pleasant state. Once the tax credit runs out, it’s hard to imagine that the economy will continue to grow, let alone increase at a 3.5% clip.

“At some point the private sector will have to sustain growth on its own,” University of Oregon economics professor Mark Thoma opines at NYT’s Room for Debate blog.

Still no evidence proving we’re getting there.