The US Economy Is Still Struggling

The government yesterday released the third quarter GDP number for the US. The headline figure showed that the United States economy grew at an 3.5% annualized rate in the months of July, August and September.

Hooray! That's great, isn't? We are out of the recession, right? The media was celebrating the number and telling everyone to party. The stock market was up about 200 points...happy days are here again!

So then why did the stock market sell off on Friday? Part of the reason is simply that yesterday's up move was just the boyz - aka Goldman Sachs, etc. - pushing the market up, hoping that together with the media hype, they would get lots of "suckers" - aka small investors - to jump in, blindly euphoric. When that did not happen, they sold.

But the main reason the stock market sold off on Friday was that the 3.5% GDP growth figure was not all that it seemed.

Almost all of the 3.5% 'improvement' came from areas where the government is spending, incentivizing, or bailing out various sectors: autos, residential real estate, and Fed spending.

A large chunk of the gain - 1.66% - came from car sales in the form of the now-defunct Cash for Clunkers program. Unfortunately, car showrooms are now back to where they were before the Cash for Clunkers program, with cobwebs gathering on most of the vehicle inventory.

Another nearly two-thirds of a per cent came from the residential real estate market thanks to low mortgage rates and the government's $8,000 tax credit for new homebuyers.

So basically, if you took out the government-stimulated sectors, the "real" economy is still flat on its back and nearly comatose.

A side note -- according to many estimates, when the Cash for Clunkers program cost is spread out over the number of incremental cars sold, the cost came to $24,000 per vehicle.

And similar estimates made on the $8,000 new homebuyer tax credit showed that it cost $42,000 for each home sale the program spurred.

The bottom line is that the government has spent trillions of dollars on programs such as these and on bailing out Wall Street - the Federal Reserve has bought $2.2 trillion of "garbage" assets from Wall Street with money printed out of thin air.

Yet, we don't have much to show for it - a three month up-blip in an otherwise comatose economy. The worry is that our economy will need constant dosages of trillions of dollars just to keep afloat.