The Case of the “Disappearing Stimulus” and the “Illusory Inventory”

Worthwhile Canadian Initiative notes that sometimes, a reported slower GDP growth rate is actually better news than another slightly higher reported rate.  As I’ve noted repeatedly on this blog and in class, it’s important to look at the numbers behind the numbers.

When 5.0% GDP growth is better news than 5.9% GDP growth

In 2009Q4, US GDP grew by 5.9% at annual rates; the number was 5.0% in Canada. But our news was much better. Here is a graph of the contributions to GDP growth by expenditure category:

US GDP growth would have been only 2.0% without the contribution of the inventory terms (which was itself a deceleration in the rate at which stocks were being drawn down.) In Canada, the 2009Q4 GDP number would have been 5.8%.

And look at the contribution of government spending. In the US, the contribution was negative: the increase in federal spending was more than compensated by cutbacks at the state level.

It’s easy to see why the Canadian numbers were greeted with more enthusiasm than were those in the US, even though the headline number was smaller. Growth was evenly distributed across all types of expenditures, and we can expect inventories to bounce back as well fairly soon.

Two observations that I’ll emphasize here.  The first I’ve made before. Most of the reported GDP growth the last 2 quarters of 2009 has actually been inventory-driven.  That’s not sustainable, so we need to see Personal Consumption and Investment growing.  Until they do, the “recovery” is in jeopardy of double-dipping.

The other observation here is that the contribution of government spending in the US was negative.  I’m sure some readers will wonder “How can that be? What about the giant $780 some billion stimulus bill?”. Well the data don’t lie in this case.  We really have NOT had much government stimulus in 2009 in the US for 3 reasons.  Yes, there was a stimulus bill, but a very large portion of it was tax cut, not spending increase.  And as we talk about in class, while a tax cut can be stimulating, it is often not as stimulating as an equal amount of spending because people save part of the tax cut and do not spend all of it. The second reason is because the “giant stimulus” bill was spread out over 2.5 years, not all in 2009.  Finally, while the federal government increased spending, this increased spending has been largely offset by cuts in spending at the local and state levels.  Net impact: negative.    Does this mean that the stimulus bill was a bad idea? that it didn’t work?  NO.  It worked – just imagine how bad it would have been (how even larger the negative impact would have been) if states and local govts had cut and not been offset by the feds.