Examining the entrails of the US economic downturn

July 1, 2009

It is Canada Day here at home but the debate still rages about whether the stimulus will work and when it will work in the U.S. We can get some guidance to this by examining closely the American GDP and its composition at the end of the third quarter of 2008 when most of the categories that compose it reached a maximum and the situation at the end of the first quarter of 2009 still in the depths of the recession.
Here is what it looks like. (All data from the US Bureau of Economic Analysis) total GDP at the end of the third quarter 2008 in billions of dollars was 14, 412.8. Total GDP at the end of the first quarter 2009 was 14,089 a fall of 2.25 %. This GDP can be broken down by sector in consumption, investment, government expenditures including government consumption and investment, federal expenditures and local and state expenditures. As of the end of the first quarter we discover some surprising results that suggest that virtually none of the stimulus at this point has been spent or what little has been spent has been negated by reductions in state and local expenditures and even reductions in federal expenditures.

Look at the data. Personal consumption at the end of the third quarter $10,163.5. Consumption at the end of the first quarter 09, $ 9941 a reduction 222.5 billion. Private Investment at the end of the third quarter , $ 2010.9 billion versus 1598.7 billion at the end of the first quarter 09- a reduction of $ 412.2 billion. Exports at the end of the first quarter $ 1968.9 billion versus 1539.3 billion at the end of the first quarter 09- a reduction of $ 429.6 billion. The total of all reductions in the components of the GDP 1.06 trillion dollars.

Now we have to factor in reduced imports which amounted to a very   substantial amount and then look at the size of the stimulus that exceeds the higher unemployment deficit that would have occured anyway to figure out how stimulative the resulting deficit will be.total tax revenues in the first quarter of 2009 were 442.39 billion down 190.76 from the 633.15 they averaged in the preceding quarters of 2008. On an annual basis this works out to a shortfall or passive deficit of about 763 billion, in other words roughly the size of the stimulus package.

Here is where we also discover the shocking statistic that imports, a substantial chunk of which come from Canada   have fallen by over 800 billion dollars. They were$ 2676.6 billion at the end of the third quarter 2008 and at the end of the first quarter 2009 they had slumped to 1872.7 for a total fall of 803.9 billion ! This is the American contribution to the global slump.

It certainly looks like the US government should have spent its stimulus more quickly than it has and that it may well have   significantly underbudgeted the size of the necessary stimulus in the light of the 1 trillion dollar drop in C + I + X and the size of its passive deficit. Some analysts believe that less than 30 % of the infrastructure monies will be spent by the end of 2009.

Instead it has moderated the slump by slashing imports but this , of course, will cause lots of trouble in other countries including Canada.There needs to be a better informed debate about the stimulus and the way that stimuli work including the all important topic of the full or high employment deficit.