August 1, 2009 11.59 p.m.
Trying to figure out how effective the American stimulus package has been at this point in the business cycle is not easy since the monies associated with the stimulus only began to be spent in late February and March of this year.The stimulus bill consisted according to the Bureau of the Budget of $180 billion of fiscal relief to state and local governments, $308 billion in tax relief, 81 billion in funding health insurance for the unemployed, and 111 billion in infrastructure investments and investments in science. and more than 100 billion in other expenditures. As of this month, August, only a fraction of the stimulus has been spent. Some sources argue that only about 60 billion of the non tax reduction funds have been spent so far. (The Wall Street Journal has an extremely detailed list of all of the 787 billion dollars worth of funding contained in the original 1000 plus page bill bill that was published on Feb 17, 2009. It covers an impressive array of projects, grants and income transfers.It is available on its web site.)
The government has stated that by the end of 2010 it hopes that 70 % of the stimulus will be spent. It is as yet unclear what proportion of the tax cuts have already been put into effect and what proportion of them have, in effect, been received by taxpayers since most taxes are paid over time in payroll deductions. But we can probably assume no more than one third of them have been expended and received by taxpayers.
In terms of the government's budget it projects a decline in corporate tax revenues from 2008 to 2009 of $157.6 billion and a fall in personal tax revenues of 97.7 billion as well as a decline in excise tax revenues of 1 billion for a total of 255.3 billion.A portion of this is accounted for by the tax reductions, the rest by the slump in the economy. According to the American government's on line Recovery.Gov site, it is suggested that, thus far, 191.9 billion dollars of the stimulus has been distributed and made available with about 70 billion already spent.
Now let us look at the GDP numbers and see what is going on in the economy. Lets begin with real GDP in chained 2005 dollars. If we start our analysis with the fourth quarter of 2007 GDP the numbers are as follows: billions of chained 2005 dollars.
Q4 07 Q1 Q2 Q3 Q4 08 Q1 Q2 09
13,391 13,367 13,415 13,325 13,142 12,925 12,892
Source:BEA:U.S.Dept. of Commerce
This data shows that the economy slumped badly from the peak it reached in Q2 2008 by the Q1 2009. The total fall off was 490 billion dollars a decline of 3.7 % including a fall of 183 billion from Q3 08 to Q4 08; and 215 billion from Q4 08 to Q1 09.
However, from the first quarter of 09 to the second quarter 09 when the first of the stimulus money is being spent the fall off is much smaller 33 billion. This, although not proof, is nevertheless suggestive of the stimulus at work.
Let us now analyse the components of this improvement in the rate of decline.
Below is the data for the same period for federal government expenditures F; state and local expenditures, S ; defense expenditures,D; personal consumption expenditures, C; and private investment, I; followed by exports, X and imports ,M. Remember that the GDP =C + I + G +(X-M).
Finally there is a line devoted to changes in private inventories which reveals where some of the disinvestment is taking place; V
.
Billions of 2005 chained dollars (rounded to the nearest billion except for F and V )
Q4 07 Q1 Q2 Q3 Q4 08 Q1 Q2 09
F $ 925.1 943.4 961.3 991.6 10007.3 996.3 10022.4
S $1544 1542 1547 1547 1539 1533 1543
D $622 635 646 675 682 673 694
C $9364 9350 9351 9268 9195 9209 9181
I $2123 2083 2027 1991 1858 1559 1472
X $1624 1623 1670 1655 1568 1435 1409
M $2188 2174 2147 2134 2039 1821 1748
V 10.3 0.6 -37.1 -29.7 -37.4 -113.9 -141.1
Source:BEA:U.S.Department of Commerce
This data shows quite clearly that the collapse in private investment and the dramatic liquidation of inventories is at the heart of the slump. Between the last quarter of 2007 and the second quarter of 2009, investment in the private sector has fallen from 2123 billion to 1472 billion an enormous drop of 651 billion dollars. Inventory liquidation has accounted for 360.6 billion of this decline in investment.
Consumption decline from its peak of 9364 in last Q. of 2007 to its nadir of 9181 in the second Q. of 2009 has also played a major role. This is a drop of 183 billion dollars.
Exports have fallen from their peak of 1670 in the second quarter of 2008 to 1409 in the second quarter of 2009 a collapse of 261 billion. This has been mitigated by the fall in imports from the peak of 2188 in the last quarter of 2007 to the level of 1748 in the second quarter in 2009 a total fall of 440 billion . The decline in the gap between exports and imports has increased the GDP and exported some of the recession to US trading partners like Canada.
Total federal expenditures actually declined in the first quarter of 2009 presumably because of the exhaustion of spending increases under the Bush Presidency and to a small extent by the fall in defense expenditures quarter to quarter. State and local expenditures fell by 14 billion from the second quarter of 08 to the first quarter of 09.
The recession deepened in this first quarter with the largest drop in private investment, a drop of almost 300 billion in private investment. In the second quarter of 2009 this drop has been reduced to 87 billion. In the second quarter the total drop in the GDP is only 33 billion compared to a drop of 217 billion in the first quarter over the fourth of 08.Total consumption fell by 28 billion as compared to a drop of 73 billion in the third quarter of 08 compared to the second quarter. In the first quarter of 09 consumption actually increased.Again these are suggestive numbers that reinforce the idea that the stimulus, both the more moderate Bush stimulus and the major Obama stimulus had a very positive effect upon private investment but much less so on consumption.
So while we can see that the stimulus seems to have had some effect on slowing the rate of fall in the economy, particularly when it is combined with the stimulative monetary policy, the results are still somewhat inconclusive on its overall impact. We need to do further analysis as more data is revealed.
The falling gap between exports and imports has also had an important effect.
The results in the next quarter should tell us much more about the effectiveness of the stimulus. Sorting out the impact of tax cuts as opposed to spending increases as opposed to the inventory depletion turning of the cycle is not going to be easy. But whatever the preferred argument the economy appears to be on the mend.
My reason for stating this is because in the next quarter so long as inventory liquidation continues to slow(it may even rebound) we are close to guaranteed to see an increase in federal government spending so long as the stimulus spending accelerates, as the Government promises it will. The cash for clunkers purchases will show up in consumption so the net result will be an improvement in the GDP number.If on top of this private investment continues to improve(last quarter it fell at a slower rate than in the previous quarter) the uptick will be even more significant.The recent gains in the stock market if they continue will also reinforce repairing animal spirits.
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