Without stimulus or clunkers, would economic growth smell as sweet?

By Laurent Belsie | 11.02.09

If America’s economy was a kitchen, the sweet aroma of growth is beginning to waft from it. On Monday:

– Ford announced an eye-popping $1 billion profit overall and its first profitable quarter in North American in four years. The automaker raised its outlook for 2011 from “breakeven or better” to “solidly profitable.”

– Pending home sales rose 6.1 percent in September, their eighth straight monthly gain.

– Manufacturing, as measured by the Institute for Supply Management, rose in October to its highest level in 3-1/2 years; construction spending rose more in September than at any time in a year.

That’s encouraging. But how much is due to a stronger economy and how much is coming from government efforts?

The short answer is that the stimulus matters and that, without it, growth would not be looking so robust.

One reason for Ford’s bullish quarter was the government’s “cash for clunkers” program, where the Ford Focus and Ford Escape were among the most popular vehicles to replace the polluting, gas-guzzling clunkers. A key reason that pending home sales number are so high is that the government’s tax credit for first-time home buyers expires Nov. 30 (unless Congress extends it).

But other factors are contributing, too. Ford’s aggressive cost-cutting has saved $4.6 billion in the first nine months of the year, more than its $4 billion target for the full year. While home sales may not grow as strongly going forward, it looks as though they hit bottom this summer.

And Monday’s manufacturing report tells a strong story. Growth in production last month was far broader than mere inventory rebuilding among automakers after cash for clunkers. Eleven of 13 industries reported growth, let by plastics and rubber products, furniture, and apparel. New factory orders were down but still strong. Manufacturers cut inventories at a slower pace than in September, suggesting more confidence in future sales.

“Those gains support our view that an increase in production and a much slower rate of inventory rundown, particularly in the auto sector, will make big contributions to fourth-quarter GDP,” wrote Paul Ashworth, a senior economist at Capital Economics, in an analysis. He predicts that growth in GDP (gross domestic product) will be on par with the third quarter’s 3.5 percent annualized growth.

While government stimulus matters, America’s economic “kitchen” is humming for reasons that go beyond federal help. And that is sweet indeed.

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