Oct. 26 (Bloomberg) -- The recession is over. Yea verily yea, as the knights of old might say with chalice raised.

The Commerce Department is expected to validate that premise later this week when it reports that the U.S. economy expanded at a 3 percent annualized rate or thereabouts in the third quarter, according to economic forecasters. It will be the first positive reading in five quarters and a sign the slump that started in December 2007 is over.

The official arbiter of such things -- the National Bureau of Economic Research’s Business Cycle Dating Committee -- isn’t about to bless the recovery just yet. The BCDC waited until July 2003 to declare an end to the March-to-November 2001 recession.

Of the four coincident indicators the committee uses to determine the onset of expansions and contractions, two have turned up -- industrial production and inflation-adjusted business sales -- and two are still falling, albeit at a slower rate.

The declines in employment and real personal income less transfer payments are one reason Main Street won’t be celebrating Thursday’s news on gross domestic product. The unemployment rate, currently 9.8 percent, is expected to top 10 percent in the next few months and remain elevated into next year, according to both Obama administration economists and private forecasters.

Permanent Separation

After that, it will be a slow slog for the out-of-work. The number of people who have been laid off permanently accounted for 56 percent of the unemployed in September, according to David Altig, senior vice president and research director at the Federal Reserve Bank of Atlanta. The share of permanent job losers (see Table A-8 in the monthly employment report) never rose above 45 percent in the six previous recessions, Altig writes on his blog, another piece of evidence supporting the forecast of a jobless recovery.

High unemployment isn’t the only reason the GDP celebration will be muted. Much of the third-quarter growth was manufactured.

This may sound whacky, but the federal government has been paying people to spend. Honest. You can’t make this stuff up.

Uncle Sam handed out your hard-earned tax dollars to prod people to scrap their old cars for more fuel-efficient models. The “Cash for Clunkers” program sent auto sales on a roller coaster ride -- first up, then down -- in August and September. Some of those buyers would have purchased a new car or truck anyway. Others used the $4,500 rebate as an inducement to strike while the iron was hot.

Pay to Spend

Just to recap: The government is paying people to do what they would have done at some point anyway.

Then there’s the $8,000 tax credit for first-time homebuyers, a program that failed to heed the lessons of the no- questions-asked-mortgage lend-o-rama earlier this decade. Some 74,000 claims may have been ineligible for the credit, including one from a 4-year-old boy, according to a report from the Treasury’s inspector general.

No one would dispute the idea that people respond to incentives: A temporary, one-time tax credit brings demand forward.

But it will take an increasingly large tax credit to get the same bang for the buck, according to Andy Laperriere, a managing director at the ISI Group in Washington.

Using estimates from the National Association of Realtors on the number of home sales that were borrowed from the future, Laperriere calculates that home sales will drop 11.5 percent next year even with an extension of the $8,000 tax credit. That’s better than the 29 percent decline he predicts if the credit expires, but the sign is still negative.

Expanding the eligibility beyond first-time homebuyers -- no toddlers allowed -- would alleviate some of the decline, Laperriere says.

Less with Less

Between the spending on houses and cars, the third quarter won’t look too shabby. The problem is that all these government actions designed to create a short-term economic boost have long-term implications.

For example, not all spending is created equal. Investment in the future, whether it’s the government improving roads or the private sector building a plant, is a plus for future growth.

“If increased government spending on retiree health care comes at the expense of business spending on capital equipment and R&D, then the productivity of the current labor force and long-run growth rate will be adversely affected,” says Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago in his October economic outlook.

Secular Shadow

That’s one reason there’s a secular shadow hanging over the upbeat cyclical indicators, starting with the Index of Leading Economic Indicators itself. The LEI bottomed in March before soaring in the last six months. The six-month annualized change of 11.8 is heralding a rebound, as is the spread between the federal funds rate and 10-year Treasury note yield -- the leadingest of the 10 leading indicators, according to the Conference Board, the keeper of the LEI.

The spread was even steeper in the early 1990s, another period when an impaired banking system depressed the monetary transmission mechanism. Until banks stop hoarding excess reserves and start lending -- they’re buying Treasuries but not making many loans -- the spread is an incentive waiting to happen.

Like all incentives, this one will work in time. I’m just worried it will run smack into some disincentives elsewhere.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

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To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: October 25, 2009 21:00 EDT