Total output as measured by Gross Domestic Product (GDP) grew at an annual rate of 7.2% in the third quarter, the Bureau of Economic Analysis reported last Thursday.

The strength in recent GDP was largely the result of strong consumer demand (see graph below).

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While the strong three month period is certainly encouraging, it is important to note continuing points of weakness including:

• The economy has lost 1.1 million private sector jobs since the end of the recession in November 2001.
• The economy has lost 3.2 million private sector jobs since the start of the recession in March 2001.
• At 12.4 percent, poverty is on the rise – and nearly 20 percent of children under 5 live in households below the poverty threshold.
• State governments continue to face their worst fiscal crisis since WWII.
• The federal government is set to run a deficit of over $500 billion in 2004.

In addition, the sustainability of this growth is questionable. As the Economic Policy Institute notes, “many of the causes underlying this growth are temporary: one-time tax cuts lifted disposable income; mortgage refinancing increased household spending; and a decline in inventories contributed to a lower trade deficit.” In order to keep acceptable levels of growth, there needs to be a sustained improvement in the labor market and continuing increases in real incomes.

Given the large increase in war-related spending, billions in tax rebate checks, and interest rates at historically low rates, it would be surprising if we did not see a good quarter of growth eventually. However, the fact that we have seen two years of stagnant growth and dismal employment outcomes – even after the end of the recession – shows that current economic policy has been poorly tailored to the current economic realities.