Economic Growth: Here Today, Gone Yesterday

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Last month, something fun happened for the first time in a long while, sparking a renewed sense of optimism. The economy grew, at a brisk 3.5%. Then, yesterday, reality made a comeback.

Third-quarter GDP growth was revised down to 2.8%. Whoops.

These revisions are fairly routine, and 2.8% is nothing sneeze at compared with the negative 6% rates we endured earlier this year. But the news is nonetheless a bucketful of cold water doused on anyone who might have hoped we were back to good times.

Of the revised 2.8% growth figure, the BEA (the agency that reports this stuff) notes that "Motor vehicle output added 1.45 percentage points." Last month, the BEA made a point to note that the gain from motor vehicle output "largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, 'Cash for Clunkers' Program)."

But Cash for Clunkers -- a sales-boosting godsend for GM, Chrysler, and Ford (NYSE: F) -- is now history. So if we were to look at GDP on a normalized, sustainable basis, growth would have come in at something in the neighborhood of 1.35%. Ouch.

Moreover, changes in inventory levels added 0.87% to the updated GDP figure. As the BEA notes, "Private businesses decreased inventories $133.4 billion in the third quarter, following decreases of $160.2 billion in the second quarter." In other words, fewer fire sales, compared with the everything-must-go mentality of earlier this year.

Without a doubt, changes in inventory are legitimate contributions to GDP growth. But are they sustainable? That's another question. Much like the cost-cutting measures that have juiced profits at companies such as Caterpillar (NYSE: CAT), Procter & Gamble (NYSE: PG), and Starbucks (Nasdaq: SBUX) this year, inventory restocking can't sustain growth forever. Sooner or later, you need real demand. As the finance blog Calculated Risk put it, "Changes in private inventories [are] transitory, and without a pickup in end demand, the boost will end soon."

So if you assume the non-Cash for Clunkers GDP growth rate was around 1.4%, and inventory changes made up more than 60% of that figure, where does that leave real, sustainable growth? I'll let you do the math.