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Investing Specialists

No Denying Anymore

The third-quarter GDP jump was more than smoke and mirrors.

Gross domestic product, the widest measure of economic activity, registered a 3.5% jump from the June quarter to the September quarter of 2009 (seasonally adjusted, annual rate). The figure came in above expectations, causing the stock market to bolt upward almost 200 points when it was announced on Thursday.

This GDP uptick isn't a fluke. I'm expecting this growth spurt to extend into the fourth quarter in the same 3.0%-4.0% range, driven by continued increases in auto production, inventory restocking, stimulus spending, and higher exports. The naysayers' chorus has tempered its tune somewhat, but the recovery's chief skeptics aren't ready to throw in the towel just yet. Their new mantra is that the economy's seemingly effervescent third-quarter robustness is nothing more than a fleeting mirage, a shallow side-effect of government-induced smoke-and-mirrors therapy such as the Cash for Clunkers program. When those programs end, they preach, we will surely fall back into the abyss. I say not.

Government: The Only Source of Better Results? No!
The bear argument is that any improvement we've seen is the outgrowth of large government programs and a willing Federal Reserve. While the programs have provided a substantial psychological lift, they haven't added that much to economic growth. Auto sales slumped back after the Cash for Clunkers program ended, but demand remained above the early 2009 trough even during September. October is likely to be substantially better than the Cash for Clunkers-afflicted September period based on weekly sales reports. Furthermore, it is auto production, not retail sales, that drives economic growth. Production has substantially lagged sales for most of this year, and I expect auto production to show new life again in the fourth quarter. Auto production has shown meaningful improvement for most of the year.