On Friday, the Commerce Department announced that real 2nd quarter GDP (gross domestic product) declined at an annual rate of only 1.0%, much better than the 1st quarter decline of 6.4%. Analysts proclaim this as evidence that the free fall in the economy has been halted.
But has it really? How much of this is real improvement in the economy and how much is artificial economic activity generated by the government’s economic stimulus plan, sure to vanish once the allocation has been spent? Of course, the whole purpose of the $787 billion economic stimulus plan is to be “stimulative,” like priming a pump. Pour a little in and you can get a whole lot more out. It’s seed money, intended to generate self-perpetuating growth in the economy.
So the critical question is whether it’s working. Did the underlying economy perform better in the 2nd quarter as a result of this spending? If so, that would be evidence that the stimulus plan is working. If not, then the deterioration in the underlying economy may actually be accelerating.
Through the end of the 2nd quarter, slightly more than $60 billion of the $787 billion has been spent. (See http://money.cnn.com/2009/07/31/news/economy/stimulus_GDP/?postversion=2009073115) Assuming that virtually all of this was spent in the 2nd quarter (since the plan wasn’t authorized until mid-February), then this spending contributed to GDP at an annual rate of about $240 billion. 1st quarter GDP was reported as an annual rate of $12,925.4 billion (expressed in 2005 dollars). 2nd quarter GDP was reported as $12,892.4 billion, for a quarterly decline of 0.25% or an annual rate of decline of 1.0%. (Thus the euphoria on Wall Street about the big “improvement” over a 1st quarter decline in GDP of 6.4%.)
But if you take away the $240 billion in stimulus spending (annual rate at current pace), then 2nd quarter GDP would fall to $12,652.4 billion, for an annual rate of decline of 8.2%! So we can conclude that, so far, the stimulus plan is failing to halt the slide in the underlying economy. In fact, the rate of decline has accelerated, from 6.4% in the 1st quarter to 8.2% in the 2nd quarter. Unless things change dramatically, while the stimulus spending may produce some artificial growth in the economy, once it’s spent we will surely slide back into a deep recession. Why? Because absolutely nothing has been done to fix the underlying problems in the economy, particularly our broken trade policy that has given away most of the entire manufacturing sector of our economy to overpopulated nations. Six million manufacturing jobs sacrificed on the altar of crude, 18th century trade theories.
President Obama had better get busy on fixing the trade situation to restore a balance of trade, as he promised during his election campaign, or he’ll go down in history as another in the long line of caretaker presidents who kept the seat warm in the west wing for four years.