Friday, July 31, 2009

GDP Falls Less Than Expected On Government Expenditures

The Commerce Department's Bureau of Economic Analysis released it's advanced estimate of gross domestic product (GDP) figures this morning which indicated that the economy contracted less than expected in the second quarter of 2009. The 1% annualized second quarter decline will likely be celebrated, as it is a departure from the ~6% annualized declines the economy experienced in both the fourth quarter of 2008, and the first quarter of the current year. The story behind the numbers is however, no cause for celebration.

The true health of the economy- broadly defined by us as the ability of the private sector to maintain capital expenditures, create jobs, and service it's debt related obligations- has seen virtually no improvement, and in fact has continued to deteriorate throughout the current quarter. What is evident though, is that Government expenditures-a dollar amount that contributes to GDP in the same manner as private investment - have been propping up our largely wilted economy. From the Commerce Department's press release:

"Real federal government consumption expenditures and gross investment increased 10.9 percent in the second quarter, in contrast to a decrease of 4.3 percent in the first. National defense increased 13.3 percent, in contrast to a decrease of 5.1 percent."

The trend towards increased Government spending is illustrated by the chart above, which takes a handful of the categories that contribute to GDP and compares the dollar value of those contributions from 2004-2008. It's obvious from the chart that Government spending is not only resistant to recessions, but that it somehow strengthens during a decline! Now, Government spending is not the same as economic activity generated by the private sector; for the most part because Uncle Sam's expenditures are not naturally allocated towards the most efficient available opportunity, as is the case with private investment. Rather, the federal government's dollars are doled out primarily via political considerations. One would expect this wastefulness to be magnified during a recession, where the number and magnitude of profitable investments is on a decline, while the Government's absolute dollar expenditures are rising. Such levels of spending will serve to create the illusion that the economy is bottoming, recovering etc., all the while the plight of the average individual continues to deteriorate. Sphere: Related Content

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