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Government Spending Supports GDP Growth in Second Quarter

Friday 31 July 2009

by: Dean Baker, t r u t h o u t | Report

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Baldor Electric Co. factory in St. Louis. Although the stimulus boosted the economy in the second quarter, unemployment will remain high for the near future. (Photo: Jeff Roberson / Associated Press)

    The stimulus boosted the economy in the second quarter, but we will still face double-digit unemployment for years.

    GDP shrank at a 1.0 percent annual rate in the second quarter, as the effects of the stimulus began to be felt. The government sector added 1.12 percentage points to growth. Most of this growth (0.82 percentage points) was at the federal level, but the stimulus allowed for a modest 2.4 percent growth in state and local spending, which added 0.3 percentage points to growth for the quarter. By contrast, the first quarter saw a 0.19 percent contraction of the state and local sectors.

    The tax cuts and benefit increases in the stimulus, which began to kick in at the start of the quarter, almost certainly prevented consumption from falling more than it otherwise would have. Consumption fell at a 1.2 percent annual rate in the second quarter. As a result of the tax cuts and benefit increases, disposable personal income rose at a 4.6 percent annual rate in the quarter, even as wage income fell at more than a 5.0 percent annual rate.

    All areas of investment continued to decline, although the rate has slowed from the first quarter. Investment in nonresidential structures, which had fallen at a 43.6 percent annual rate in the first quarter, fell at just an 8.9 percent annual rate in the second quarter. This decline is likely to continue in future quarters as more projects are completed. With considerable overcapacity in most areas of nonresidential building, there will be little reason to start new projects.

    Equipment investment fell at a 9.0 percent annual rate. With new orders for capital goods continuing to fall through the second quarter, there is little prospect that this sector will turn around before the end of the year. Inventories continued to shrink, subtracting 0.83 percentage points from second quarter growth, though considerably less than the 2.36 percentage-point drag in the first quarter.

    Housing again contracted sharply in the quarter, falling at a 29.3 percent annual rate, which is an improvement from the 38.2 percent rate of decline in the first quarter. Housing is now just 2.4 percent of GDP, the lowest point in the post-World War II era. While it is unlikely to sink much further, there is little hope of a sharp bounce back in the housing sector, which had been the fuel for prior recoveries. There are enormous inventories of unsold housing by every measure, with the vacancy rate still standing at a record level. High unemployment and underwater mortgages will keep foreclosures at close to an annual rate of two million. And mortgage rates are almost certain to go up rather than down.

    The 15.1 percent rate of decline of imports substantially outstripped the 9.3 percent decline in exports. As a result, trade added 1.38 percentage points to growth in the quarter. However, this is likely to be reversed in the third and fourth quarters. As firms start to rebuild their inventories, they will increase their imports. As a result, in the second half of the year, inventories are likely to switch from being a drag on growth to being at least a small positive. At the same time, the trade balance will likely deteriorate, with trade again being a drag on growth.

    It would be very difficult to paint a positive picture on this GDP report. The rate of decline is slightly less than had generally been expected, but this is partly attributable to the fact that the first quarter decline was revised upward by 0.9 percentage points. The quarter's numbers would clearly have been much worse had it not been for the stimulus, but it is important to note that the impact of the stimulus was approaching its maximum level in this quarter.

    The tax cuts and benefit increases from the stimulus were already largely in place this quarter. With nominal wage growth having almost completely stopped (according to the BLS Employment Cost Index, private sector wages grew at just a 0.2 percent rate in the quarter), it is virtually certain that disposable income and consumption will decline through the rest of the year. State and local spending is likely to contract in future quarters. Housing and investment may level off, but there is no sector of the economy that will provide any substantial boost to the economy.

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Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout's Board of Advisers.

Comments

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There is no GDP growth in

 Fri, 07/31/2009 - 22:01 — radline9 (not verified)
There is no GDP growth in the last quarter. GDP has shrunk again but by less than it shrank the quarter before. Also, those jobs are mostly going going gone for more than the foreseeable future, as monster corporations replace workers with robots as fast as they can. Green jobs are not going to appear like magic. They are a risky bet. The best place to find jobs will be in the inflated health care industry or on wall street, but you will have to hold your nose to work there.

The overwhelming success of

 Sat, 08/01/2009 - 02:12 — mysterioso (not verified)
The overwhelming success of the "cash for clunkers" rebate program shows that this government spending program works. Americans will shop when there is a bargain. The program had one billion dollars set aside to give to auto dealerships when people were trading in their cars or trucks. $3,500 if you were buying a new truck, $4,500 if you were buying a new car. As of July 31 the program has already gone through the one billion, surpassing all expectations. At this writing congress is voting on another 2 billion to continue the program. There is some confusion here. What car shoppers are not being told on the news or in Obama's and others sound bites is that the car you are trading in must "qualify". That means it must be rated for a combined 18 mpg or less. I missed by one mpg and can't buy a new car due to lack of bread. My '92 mini-van will have to chug on. The other stipulation is that the car or truck you were going to purchase had to also meet a mpg standard. (no Hum-V's or 12 cylinder Jag's or 16 cylinder Bugatti Veyron's)

Time to end the war on

 Sat, 08/01/2009 - 15:48 — Anonymous (not verified)
Time to end the war on drugs. Bring them back into the open market and tax them. This is an underutilized revenue stream and would address the issue of violence in the underworld related to the illicit drug trade. And what would that do to our prison system? All the money spent incarcerating folks, where could we spend that money? Rebuilding the infrastructure of the nation? Roads? Bridges? Schools? Health care funding? Lots of training opportunities here, apprentices in the trades, educators, career transition specialists. We are entering a brave new world. Is it going to be dominated by the health (read sickness) industry, oil (read anti-alternative energy), banking (sold my soul to the company store), war (profiteering)? Or are those domains of human endeavor going to resume their rightful place as effective subsystems of the larger social systems? What an amazing time of opportunity and transformation.

With the U.S. economy

 Mon, 08/03/2009 - 20:22 — Anonymous (not verified)
With the U.S. economy struggling, we need policies that will spark immediate business investment and encourage capital investment. We must continue to create overseas opportunities for American companies and chip away at the deficit by taking steps to control wasteful governmental spending. Read and learn about policies that need attention at http://www.friendsoftheuschamber.com/issues/index.cfm?ID=104 .