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Economic Growth in 4th Quarter Based in Part on Temporary Factors

Just to give a fuller account of the state of the economy, a new estimate from the Bureau of Economic Analysis shows that the economy grew at a 1.8% rate in the third quarter of 2011. That’s not good at all, a below-average report. The fourth quarter trends look much better, perhaps as much as double that 1.8% uptick. Looking at unemployment claims and consumer confidence and manufacturing statistics and other indicators, we can estimate as much as a 3.5% growth for the fourth quarter or maybe even higher. But why is that happening? Economists say that some temporary factors are the cause:

The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.

Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

None of these factors are likely to continue into next year. Inventories will be stocked, and the orders affected by the tsunami will have been filled. You would think that increases in growth would lead to a rise in gasoline prices, though that’s a little less clear. And absent wage increases, it will be difficult for consumers to continue to finance increased spending.

So as a result, you can expect growth to settle at a more moderate level. The question is how moderate. And taking $160 billion out of the economy by having the payroll tax holiday and extended unemployment benefits expire would dampen growth significantly and cost hundreds of thousands of jobs. I think the proper adage right now is that you “first do no harm.”

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David Dayen

David Dayen