Here's Why the Economy's Growing

Gross domestic product grew 3.5% in the third quarter. That's great news and all. Only a few months ago, GDP was falling at a 6%-plus clip, and we were certain the economy was about to meet a fiery death.

String together another quarter or two of growth, and the powers in charge will declare the recession over. That really means nothing, but it'll produce great headlines that make people feel good again. That's how these things work.

But what's important is why GDP is growing:

Source: Bureau of Economic Analysis.

Export growth was on fire, thanks in part to a weaker dollar. But exports are a relatively small portion of our economy, so even though growth is big, the final contribution isn't. In fact, net exports (exports minus imports) decreased the final GDP figures.

Our economy is truly reliant on consumer spending. That's why Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) dominate the landscape while manufacturing withers. You can see that by breaking out the contributions that made up the 3.5% gain:

Source: Bureau of Economic Analysis.
*Increase mainly attributable to change in inventories.

OK, so spending is just blowing up. The 2.36% contribution was the largest since early 2007, when we couldn't spend enough. If it seems suspicious to you, it should.

And sure enough, tucked into the Bureau of Economic Analysis' comments was this little nugget: "Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP."

Motor vehicles, huh? GM? Ford (NYSE:F)? Chrysler? You guys back in the game?

No, they're not. You'll remember a neat little program called Cash for Clunkers, which paid people to buy cars earlier this summer. We can assume that it alone is almost entirely responsible for autos' gain.

In fact, durable goods, which include auto sales, surged 22.3% in the third quarter, compared with a 5.6% decline in the second. The Bureau doesn't even try to beat around this, admitting, "The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, "Cash for Clunkers" Program)." Mmm-hmm.

And what's funny is that, despite the contribution to GDP, Cash for Clunkers was grossly inefficient. Edmunds.com crunched some numbers and estimates the average cost to taxpayers per extra car sold was $24,000. Of the 690,000 vehicles sold under Cash for Clunkers, 565,000 would have been purchased without an incentive. The same can be said for the $8,000 first-time homebuyer credit. The eminent finance blog Calculated Risk estimates the final cost to taxpayers could exceed $100,000 per extra home sold. Yay! Success!

So, yes, GDP grew handsomely in the third quarter. But an overwhelming amount of the gain was attributable to Cash for Clunkers, which is now extinct. Lies, damned lies, and statistics, people.

This article has been updated to clarify the results of the Cash for Clunkers program.