The United States government reported that real Gross Domestic Product increased at a seasonally adjusted annualized rate of 3.5 percent in the third quarter. Improvements in Consumer Durables consumption, up 22.3 percent, and Residential Fixed Investment, up 23.4 percent, were the key components driving the increase. Both of these gains were in turn driven by government programs. Cash for Clunkers had a huge impact on motor vehicle sales, which did well in July and August, but fell dramatically in September. The Residential Fixed Investment growth was a consequence of the Federal Homebuyer’s Tax Credit.

While Cash-for-Clunkers has expired, the Federal Homebuyer’s Tax Credit is likely to be expanded and extended. A bill is moving through the Senate. Once the bill gets to the House, prospects for passage are high. In addition to extending the $8,000 credit to first-time homebuyers, a new $6,500 credit for returning homebuyers will be available for applicants who have lived in their home for at least five years.

Going forward, the extended and expanded Federal Homebuyer’s Tax Credit could provide additional stimulus to the economy through residential fixed investment, and to a lesser extent, consumer durables. We wonder how much of the related home purchases are adding debt to the household sector. Part of the reason the housing market collapsed was excessive leverage. If the debt levels are still too high, and they may be, this tax credit may be creating more future pain in housing.

We expect motor vehicle sales to be noticeably weaker in fourth quarter, because third quarter sales included purchases that were moved forward from fourth quarter. We expect high unemployment rates, high mortgage defaults, and high foreclosure rates will persist through the fourth quarter and beyond. These will imply at least some weakness in all consumption categories.