Thursday the government reported that GDP rose at an annual rate of 3.5% in the third quarter, rising from an annual rate of $12.901.5 trillion in the 2nd quarter to $13.014 trillion in the 3rd quarter. (Expressed in 2005 dollars.) The government would have us believe that this is great cause for cheer – evidence of a rebounding economy and the end of recession.
But how much of this is real growth versus the illusion of growth created by government stimulus spending? In March the government passed the American Recovery and Reinvestment Act, authorizing the spending of $787 billion to boost the economy. Proof that it’s actually stimulating the economy would be an increase in GDP if the stimulus spending is removed.
The 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 quarter, stimulus spending increased to $113 billion, for an annual rate of $452 billion. If this spending is removed from 3rd quarter GDP, we find that the underlying economy has continued deteriorating, albeit at a slower pace, at an annual rate of 3.5%. Without the stimulus spending, 3rd quarter GDP would be 7.5% below the peak GDP reached in the 2nd quarter of 2008. (It should be noted that that figure was also “stimulus-aided,” the result of the Bush administration $150 billion tax rebates.)
Making matters worse, real per capita GDP (sans stimulus spending) fell to its lowest level since 3rd quarter 2003, with the addition of another 300,000 people to the U.S. population contributing to the decline.
This is why some political leaders, economists and financial pundits are raising alarm over the possibility of backsliding into recession once the government stimulus is removed – because the underlying economy continues to deteriorate, and not at a slow pace. It’s likely that the government will enact new stimulus measures to sustain the illusion of economic growth, but at the risk of record deficits alarming the financial community in a way that will send interest rates soaring, countering any stimulus measure. It would be amusing to watch such idiotic economic policy play out were it not for the devastating effects on the vast majority of Americans.