Curious Capitalist

Stop Bemoaning the New GDP Numbers: It’s Good News

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Economic pundits are bemoaning the fact that first quarter GDP numbers released last Friday were weaker than expected – growth was 2.5% rather than the 3% that everyone had been expecting.

I actually took it as positive news. For starters, was it really possible that we’d suddenly gone back to our normal, historic 3% trend growth? The optimism in the economic forecasts always seemed to have more to do with the fact that we didn’t fall completely off the fiscal cliff a few months back.

In fact, the economists and investors letting out a collective exhale a few months back made us forget about the coming effects of the sequester. But there was no denying them in the first quarter numbers – the slower than expected growth was all about the public sector slamming on the brakes. “The decline in government expenditure over the past two quarters is the biggest six month contraction since the Korean War ended,” notes Capital Economics’ chief US economist Paul Ashworth.

The lack of government spending is the reason for the 2% economy – since mid 2009, GDP growth has averaged 2.1% in the U.S., but if you strip out the public sector, that average jumps up to 3.1%. In the first quarter, for example, consumer spending was the major source of growth — consumption accelerated to 3.2%, up from 1.8% at the end of the previous year. That was due in large part to the fact that American consumers have done the hard work of repairing their personal balance sheets, and are finally in the black. They can afford to dip into savings to spend a bit more, and they did – the savings rate in the first quarter was down to 2.6% from 4.7% before.

But that’s unlikely to continue. There’s no sign of the unemployment rate ticking down anytime soon, and what downward movement we have seen recently is likely because the labor force participation rate in this country is at its lowest since the early 1980s, before women fully entered the workforce. People are frustrated about not finding jobs, and they are settling for less — or leaving the market altogether. That means wages can’t rise, and you simply can’t have a robust recovery in an economy like ours, which is 70% consumer spending, if consumers don’t have more money to spend.

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In fact, the second quarter numbers this year are likely to make the first quarter seem a gift. University of Michigan consumer confidence numbers are now at their lowest level since the fiscal cliff crisis. Retail sales in April look weak. And housing, while in recovery, isn’t yet booming in a way that would make people feel a lot wealthier. My sense is that we’ll see a slow and steady recovery for another couple of years, if we’re lucky. Meanwhile, the sequester ensures that we’ll have yet another big contraction in government spending over the next few months. The result? Likely a continuation of the 2% economy.

It’s amazingly bad policy, particularly considering all the news over the last couple of weeks about the flaws in the argument made by economists Ken Rogoff and Carmen Reinhart that high government debt levels undermine growth. It turns out there isn’t necessarily a magic debt number after which growth falls off the cliff; it’s more about what sort of debt you have, and whether government spending is actually helping spur growth. Sure, we need to rein in longer term entitlement spending, but as Ashworth notes, much of that debt comes due decades in the future and is calculated based on interest rates and mathematical formulas that will almost surely be revised downward in time. Meanwhile, we’re in the process of cutting all sorts of useful government spending for things like education and government funded R & D at a time when the private sector still can’t (or won’t?) pick up the slack, and consumers have little wiggle room.

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On a more positive note, however, I do think that the second half of the year is going to be better than the first. It’s even possible that we could see growth creep back up closer to 3% if housing does well, and companies flush with cash start to spend a bit more on workers. But the growth will continue to be dampened by government – which makes you wonder what sort of GDP figures we might have if Washington actually worked.

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13 comments
mary.waterton
mary.waterton

GDP = private consumption + gross investment + government spending + (exports -imports)

Notice the "government spending" component. With annual Federal deficits still over $1 TRILLION, I would submit to you that it's not rational to say that a 2.5% growth rate is "good news". If the deficits had dropped to $500 BILLION with a 2.5% growth rate, then I would agree the economy is returning to health because it would indicate the private sector is carrying the load. As the article points out, there are still no jobs. Why? Because the government is carrying the economy and not the private sector.

Ohiolib
Ohiolib

Of course it's good news-unless you're an R. Then, it means that your attempts to sabotage the economy and blame it on Obama isn't working.

reallife
reallife

I would wait until the usual "revised" numbers come out... you know, the ones that wont show up in this tabloid

RationalAdult
RationalAdult

Nice MMT explanation of the facts we see instead of most reporter's echoing neo-liberal ideology.

I'll subscribe to your posts!

Thanks!

bbsnews
bbsnews

Rana, let me help you in your conclusion for this article, you seem to have missed a salient fact:

"... But the growth will continue to be dampened by government – which makes you wonder what sort of GDP figures we might have if Washington actually worked."

Here's what your sentence should have said if it was to tell the TRUTH that most Americans know by heart:

"... But the growth will continue to be dampened by Republicans – which makes you wonder what sort of GDP figures we might have if Republicans actually worked for the people instead of for the transnationals who keep their money offshore and are bilking the future of America's middle class."

The sad fact is that there would be no need for nibbling around the edges of "tax reform" and other stop gap tiny policy changes if the Republicans were not wholly owned and operated by the corporate oligarchy in the United States that controls media, the courts, the banking system and the GOP.

melonheadx13
melonheadx13

it's bad news for the republicants who have tried to dismantle the destroy the economy.

sacredh
sacredh

"Meanwhile, we’re in the process of cutting all sorts of useful government spending for things like education and government funded R & D at a time when the private sector still can’t (or won’t?) pick up the slack, and consumers have little wiggle room."

Th GOP just wants Obama to look bad. The country is paying the price? Too bad. Stifling growth is the patriotic thing to do.

bbsnews
bbsnews

@reallife So if Time is a tabloid, give me an example of what you see as real news?

MrObvious
MrObvious

@sacredh 

I just don't get it. We used to have a media that would rip any party to pieces who would throw dirt in the machinery, but now we have a party dedicated to pouring cement we get the panic reports about economy sputtering on but not the reason why.

sacredh
sacredh

The media isn't liberal. The Koch brothers own a good chunk of it. They cry about the liberal media even as it gets more conservative every day. White is black now.

sacredh
sacredh

The left realizes that Fox doesn't have anything to do with actual news or truth, but much of the right believes anything that plays to their irrational fears and predjudices.

curt3rd
curt3rd

The Koch brothers are real people but you do realize that the Newsroom is a fictional show?