Stimulus Spending Masks Huge Decline in 2nd Qtr. GDP

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.

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11 Responses to Stimulus Spending Masks Huge Decline in 2nd Qtr. GDP

  1. Mark A. Hall says:

    I agree that government spending works better than tax cuts to stimulate the economy.

    However, this recession is UNLIKE any that we have ever seen. A prolonged, stagnant recovery in job creation will prove to be devastating for our overall economy.

    Since our federal government is the ULTIMATE DECISION MAKER with regard to our national economic strategy and policy, it should be the DUTY of our federal government to fund rational and justified municipal government and state government budget shortfalls resulting from our much maligned federal decisions.

    Only then, when we start acknowledging TRUE annual composite budget deficits of $2 to $3 trillion for our municipal, state and federal governments will we FINALLY grasp the fatalistic flaws in our current national economic strategies.

    Although many economists, business leaders and government officials have expressed concern about the POSSIBLE inflationary affects of providing domestic consumer demand with domestic consumer supply, it appears, given our current economic strategies, that the ONLY other option available will result in severe “Tax Inflation” to fund our continuing economic decline.

    We need to bring back American Wealth & Prosperity……..

    We need to bring back American Pride……

    We need to bring back AMERICAN MANUFACTURING.

  2. Mark A. Hall says:

    In addition……

    In consideration of the FALSE economic growth measurements reflected by the changes in U.S. GDP, would a better indicator of true U.S. economic growth include changes in total debt outstanding?

    For example: In 1999, the “U.S. Credit Market Total Debt Outstanding” was $17.253 trillion, which represented 186.16% of total U.S. GDP ($9.268 trillion).

    In 2007, total U.S. GDP equaled $13.807 trillion. Compared to 1999, this represented a 48.97% increase in GDP over an eight year period or an average annual growth rate of 6.12%.

    However, in 2007, the “U.S. Credit Market Total Debt Outstanding” was $31.249 trillion, which represented 226.33% of total U.S. GDP ($13.807 trillion).

    Had the “U.S. Credit Market Total Debt Outstanding” as a percentage of U.S. GDP been required to remain constant at 186.16%, then in 2007 the “U.S. Credit Market Total Debt Outstanding” should have equaled $25.703 trillion.

    Therefore, if the actual 2007 “Total Debt Outstanding” ($31.249 trillion) was reduced by the budgeted 2007 “Total Debt Outstanding” ($25.703 trillion), the resulting difference ($5.546 trillion) should be deducted from 2007 total U.S. GDP to arrive at adjusted U.S. GDP.

    This Adjusted U.S. GDP would represent our actual real growth.

    As a result, the 2007 Adjusted U.S. GDP would have equaled $8.261 trillion. This would have represented a 10.87% decrease in actual real growth when compared to 1999.

    In essence, the growth in U.S. GDP from 1999 to 2007 was ENTIRELY debt driven.

    We should be using AGDP vs. GDP as a true measurement of U.S. economic health.

    Does my reasoning seem correct?

  3. mtnmike says:

    Mark Hall,

    Excellent comments above and sound reasoning. The jewel in your posts was, “it should be the DUTY of our federal government to fund rational and justified municipal government and state government budget shortfalls resulting from our much maligned federal decisions.”

    I would take that one step further, the Federal Government should also be required to fund all the skyrocketing private deficits; after all, growth of debt is the only true agriculture left in America.

    If in fact a person considers all deficits (public and private) in America, GDP is falling like a dropped rock and gravity is far more in control than our leadership.

    • Mark A. Hall says:

      If President Obama and his ECONOMISTS???? don’t soon change the direction of our national economic strategy, instead of being remembered as the “Great Visionary & Rectifier”, he will be ONLY remembered as the president who succeeded George W. Bush.

  4. mtnmike says:

    Mark,

    As you allude to, our economic model is arithmetically flawed as it supposes an infinite planet as a platform from which to increase endless resource production. That is of course impossible.

    Obama is a young man whose life experiences ill prepared him for his present position. The Clinton administration economist re-runs are finding that cooking the books the second time is far more difficult than anticipated.

    • Mark A. Hall says:

      Mtnmike,

      Have you not read the book “COOKING MADE EASY”?

      Check out this possible recipe…….

      BREAKING NEWS………….

      In a recent press release, top government officials indicated that they expect the U.S. economy to achieve “Full Employment”* by the end of August, 2009.

      *Footnote: For statistical purposes only, the U.S. Department of Labor is revising its definition of “Full Employment” from a 4.0% unemployment rate to a 10.0% unemployment rate.

      • Pete Murphy says:

        Thanks for the comments, guys. Mark, I need to think some more about your proposed calculation of GDP, but I think it has real potential to strip out all the phony growth that the government reports. I’ve been trying to come up with a method for doing that, and this might be it. Thanks!

  5. Mark A. Hall says:

    Your Welcome Pete…..

    I think you need to gather up a few hundred copies of your book, your published thoughts and opinions and your predictions and deliver them personally to Mr. Obama & Company.

    Thus far, it appears that they are just sitting in a hay field watching the grass grow for lack of a SOLID and SENSIBLE direction.

    NOTE: Please remember to go in disguise and provide them with the Chinese version of your book. Otherwise, they will probably laugh at you and claim that you are another one of those uneducated and poorly trained Americans that need to be re-trained in the SCHOOL of FREE TRADE……..

  6. […] is getting better every day under the steady hand of Barrack Obama and company. Please read this excellent article [1] by fellow blogger Pete Murphy to shed a little light on that […]

  7. […] is getting better every day under the steady hand of Barrack Obama and company. Please read this excellent article by fellow blogger Pete Murphy to shed a little light on that subject. The current government […]

  8. […] fact is that the underlying economy continues to deteriorate.  As I reported in Stimulus Spending Masks Huge Decline in 2nd Qtr. GDP, the underlying economy contracted at an annual rate of 8.2% in the 2nd quarter.  In the 3rd […]

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