Americans' enthusiasm for cheap auto financing jacked up October's retail sales past even the most optimistic prediction. But the buying spree might not spare the U.S. economy from recession.

"Remember that what factors into

gross domestic product is not the sale of the car, but the making of the car," said David Greenlaw, chief U.S. fixed-income economist at Morgan Stanley Dean Witter. While it's encouraging that "consumer demand can be stimulated by incentives and deals," Greenlaw said, it's production that matters from the standpoint of overall

GDP. And despite the gains, automakers still are announcing production cuts for the fourth quarter, he noted.

According to the Commerce Department, October's 7.1% gain in retail sales was driven by the success of auto financing incentives. Auto sales rose by an eye-popping 26.4% in October, after falling by 4.5% in September. The overall retail sales gain surpassed a consensus forecast of 2.5% compiled by

Bloomberg

. The number even topped the highest estimate of 6% in the survey.

Minus autos, October's retail sales rose by 1%, still exceeding the consensus forecast of 0.3%, after a 1.5% decline in September. Among sectors, sales of building materials rose by 2.8%, up from a decline of 2.6% in the prior month, while clothing sales soared 6.9%, after falling 5.9% in September.

Autos, housing-related and retail issues strengthened today.

General Motors

(GM) - Get Report

, which said Monday it was extending the deadline of its discount program to Jan. 2, gained 2.3% to $46.03. Rival

DaimlerChrysler

(DCX)

rose 2.4% to $38.55, but

Ford

(F) - Get Report

slipped 0.5% to $16.34.

Meanwhile,

Home Depot

(HD) - Get Report

rallied for the second-straight day, as investors continued cheering its strong third-quarter profits and outlook. Its shares finished up 5.1% to $46.23. And its closest competitor

Lowe's

(LOW) - Get Report

, which reached a new 52-week high of $42.20 today, closed up 3.3% to $42.06. Toolmakers

Stanley Works

(SWK) - Get Report

and

Black & Decker

(BDK)

powered up, while apparel maker

Gap

(GPS) - Get Report

soared 7.7% to $15.08.

Fuely Heads

The retail gains are "a good sign" that fourth-quarter GDP could be in positive territory, said Jennifer Rossum, economist at Thomson Financial/IFR. Economists generally define a recession as two consecutive quarters of contraction; the economy notched its

first quarterly decline in about eight years last month, contracting at a rate of 0.4%, in part because of a big slowdown in consumer spending.

While the elimination of financing interest is a temporary measure to prop up demand, the fact that GM has extended its car incentives into next year could propel November auto sales higher, "or at least keep them relatively high," Rossum said.

The incentives at Ford and DaimlerChrysler are due to end about Nov. 20. But analysts expect them to follow GM's lead. "They're going to have to do something in order to remain relatively competitive," said Domenic Martilotti, auto analyst at Bear Stearns.

On the whole, the near-term outlook for consumption looks reasonably positive, Rossum said, citing a "refinancing boom" in the housing sector that "puts a lot of cash into people's pockets." Today's report also suggests that the

Federal Reserve may not cut short-term interest rates again in December, Rossum added.

Nevertheless, Rossum said she'd require another month of "firm retail sales" in order to ascertain the state of consumer spending. If spending stays stable in November, there's a good chance we could see a "relatively flat or a small increase" to fourth-quarter GDP, Rossum said.

Tank

Greenlaw, however, wasn't as optimistic. In a report issued after this morning's retail sales, he reaffirmed estimates calling for fourth-quarter consumption "close to zero" and a GDP decline of about 3.5%.

"Note that the auto dealer component of retail sales does not factor into the GDP data," Greenlaw wrote. "Instead, government statisticians use the more reliable unit sales data from the automakers." The economist said the downside is that automakers are still cutting production levels, which drags on GDP.

Analyst Martilotti agreed. The financing incentives may be fueling auto sales for now, but lower production volumes are the trade-off. "It's a balance of, do we want to run low production volumes, or do we want to make less margin per vehicle and ship more vehicles," said Martilotti, who said production levels "aren't great." (

TheStreet.com

recently examined

this issue in a separate story.)

On the other hand, auto inventories are probably at their lowest levels in 10 years as the promotions "have blown them out," Martilotti said. But again, incentive-driven demand could be short-lived. "As time goes on, this type of promotion becomes less effective because the media impact goes away," Martilotti said. "You've already brought out the buyers you wanted to get."