Did the Government “Rig” 3rd Quarter GDP?

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Prior to the release of this morning’s report of 3rd quarter GDP, economists had been forecasting an annual rate of increase of 2.5%.  I thought they were crazy.  Did it feel like the economy grew in the 3rd quarter?  Not to me or to anyone else.  Most economic reports were negative during the quarter, prompting speculation that the U.S. was sliding back into recession.

But, sure enough, 3rd quarter GDP came in exactly as forecast – an annual rate of growth of 2.5%  (See the above link.)  So I began to update my spreadsheet in preparation for this post.  If you’ve been a follower of this blog, you know that I’ve been following not only GDP and expressing it in per capita terms, but I’ve also been tracking what GDP would have been without the spending attributable to the “American Recovery and Reinvestment Act of 2009,” since that spending would end in a couple of years.  It’s important to know what shape the economy is in when that spending goes away. 

Spending on the Recovery Act peaked in the 2nd quarter of 2010 – over a year ago – and has been winding down ever since.  The Act authorized a total of $807 billion in spending, which was expected to last a couple of years.  Through the 2nd quarter of 2011, $660 billion had already been spent.  Spending had slowed to $26.8 billion in the 2nd quarter of this year. 

So it seemed unlikely that the nice bump in GDP coud be attributed to spending on the Recovery Act.  But, boy, was I wrong!  Recovery Act spending in the 3rd quarter of 2011 jumped to $62.1 billion, it’s highest level since such spending had peaked in the 2nd quarter of 2010!  (Here’s a link to the Recovery Act web site:  http://www.recovery.gov/Pages/default.aspx.  And here’s a link to the cells in my spreadsheet that track the stimulus spending:  stimulus spending by quarter.)  Take away that spending and 3rd quarter GDP would have actually contracted at an annual rate of 1.8%!  Worse, if you factor in population growth and express GDP in per capita terms, it contracted at an annual rate of 2.6% in the 3rd quarter, falling to $41,958 per person – lower than it was in the 4th quarter of 2004.

Here’s my chart of GDP per capita, with and without stimulus spending:  Real Per Capita GDP

Did the government intentionally boost Recovery Act spending – through actual spending or accruals – in order to rig the 3rd quarter GDP numbers?  Or was the sudden spike in spending explainable and a mere coincidence?  The third quarter is actually the last quarter of the federal government’s fiscal year.  Was there a push to pull forward spending in order to make spending next year (an election year) appear to be reduced?  Or were there valid reasons to accrue spending at the end of the fiscal year?  I don’t know, but it looks extremely suspicious that this was a tactic used to rig the GDP number and make the economy appear to still be growing when, in fact, we are sinking deeper into recession.

What I do know is this:  the Recovery Act spending is nearly over.  In August, Congress agreed to hundreds of billions in cuts.  And, soon, the “super committee” will identify another $1.5 trillion in cuts to federal spending.  Take away all that spending (or even some of it, since it’s sure to be back-loaded over 10 years), and the result will be big downward pressure on GDP.  Anyone who looks at today’s report and draws encouragement that the worst of the downturn is behind us is making a very big mistake.

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