US GDP falls by less than expected

July 31, 1:33 pm

The US GDP data released today shows that in the second quarter the American economy continued to shrink but by much less than the previous quarter and substantially less than most economists expected. The GDP fell by 1.0 % as compared to falling by 6.4 % in quarter one and 5.4 % in Q4 2008 and 2.7 % in Q3 of 2008. The American slump which began in the last quarter of 2007 is now almost 20 months old. The report which is richly detailed shows that the previous data for these quarters has been revised and shows that the recession was even deeper then earlier data suggested.It also shows the contribution that Federal government and state government spending on consumption and investment has played in shoring up the economy while private business investment in plant and inventory slumped. Exports have also fallen dramatically. The stimulus so far has been working and much   more is to come in the next four quarters. As the private sector begins to reinvest in inventories and animal spirits recover the stimulus will strongly reinforce these recovery forces.
Thus far the markets have responded as I thought taking on the positive news from the better number in this quarter but prudentially being cautious because of the revisions which show how serious the collapse in business investment and inventories have been in previous quarters.As I write this I note that the Dow is up 33 points and the S & P up 3 points.

When we look more closely at the changes in real GDP by sector quarter by quarter we can see just how enormously private sector investment collapsed in the last several quarters. It fell by 7.7 % in the fourth quarter of 2007;7.4 % in the first quarter of 2008; 10.14 % in the second quarter; 6.9 % in the third quarter of 08; by 24.2 % in the fourth quarter of 08; down 50.5 % in the first quarter of 09 and finally down 20.4 % in the second quarter of 2009.

The government sector is also very revealing. Look at these numbers. Federal government spending including spending on defense over the past seven quarters is as follows: up 2.7 % Q.4 07; up 8.1 % Q.1 08; up 7.8 Q.2; up 13.2 Q.3; up 6.5 % Q.4 08; down 4.3 % Q.1 09; up 10.9 Q.2 2009.

This last series of data shows something very important. In the first quarter of 2009 total federal government spending declined. This was also the quarter when the real GDP fell by the largest amount. the most recent quarter showed Federal spending sharply up by 10.9 % and the GDP fell by the least amount over the past 8 quarters. The explanation for the fall in federal spending seems to lie with sharp fall in defense spending in that quarter and the slowness with which the stimulus package got underway at the outset of the new administration. The data also suggests that the Bush administration during the preceding 6 quarters also acted in a Keynesian fashion by sharply increasing government expenditures although not enough to have reversed the deep downard motion of the economy.

State and local expenditures which show the negative impact of these levels of government upon GDP are as follows: up 7.6 % last quarter 07; Q1 08 down 0.5; Q2 08 up 1.2%; Q3 08 up 0.1%; Q.4 08 down 2.0; Q1 09 down 1.5 %.

Non defense federal expenditures are as follows: up 7.6% Q.4 07; Q1 08 up 8.1%; Q.2 08 up 9.6 %; Q.3 up 0.1; Q.4 up 12.7 %; Q1 09 down 2.5 %.

So if we are to draw some tentative conclusions from this data we can see that the collapse in private investment in response to the shock of the crash and   the tightening of oil prices alongside the fall in exports drove the economy into deep recession. Consumer spending also fell by not nearly as dramatically a margin. Federal government spending but not really local and state spending has been essential to moderating the slump and driving in the coming months the recovery process. This will take off when firms begin to reinvest in inventories and new plant and machinary. This should begin in the next stage.

The cut in government spending which occurred in the first quarter of 2009 must not be repeated until the economy has been restored to positive growth and much lower unemployment.