Yesterday the “flash” estimate for GDP growth in 1st quarter 2011 was released. Not good. GDP only grew at a 1.8% annual rate, down from the 3.1% we experienced in the 4th quarter of 2010. This is very disappointing, but not really surprising. Before I comment, I’ll let CalculatedRisk report and show one of his great graphs.
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2011 (that is, from the fourth quarter to the first quarter) according to the “advance” estimate released by the Bureau of Economic Analysis
This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q1 at 1.8% annualized was below trend growth (around 3.1%) – and very weak for a recovery, especially with all the slack in the system.
The graph really puts into context just how slow and disappointing this “recovery” has been. The recession of 2007-09 (the blue shaded area) was worse than the recessions in the early 1980’s. But look at how fast the economy was able to recover from those earlier recessions. Growth rates in 1981, 1983, and 1984 were well over 6% and at times over 8%. The economy truly “recovered” the ground lost in the recessions before settling down to the long-term growth trend (the dotted line). In contrast, we are almost two years into this poorly-named “recovery” and we are struggling to even get up to the long-term growth rate. We haven’t really recovered at all.
It’s worse, though. The signs are pointing down. To recover, we needed to have better than 4th quarter growth. But instead, things are slowing down. And they are slowing down despite having gotten some significant stimulus at the beginning of the first quarter. Remember last December Congress and President extended the large Bush-era tax cuts for the top-bracket income earners. Republicans told us it was necessary to grow the economy and create jobs. We also cut the payroll tax for this year only for Social Security as an attempt to stimulate the economy. The Federal Reserve implemented Quantitative Easing II program throughout the first quarter, promising us it would stimulate the economy. Yet despite these efforts to stimulate the economy, the economy is actually slowing.
Why? Let’s look at the data. There’s lots of culprits, but the most significant ones are drops in Investment spending and drops in Government spending. Again, Calculated Risk reports from the BEA news release yesterday (emphasis mine):
• Investment: Nonresidential structures decreased 21.7 percent… and real residential fixed investment decreased 4.1 percent.
• Government spending subtracted 1.09 percentage points in Q1 (unusual)
Basically it’s two big things. First, Investment spending is decreasing overall, not increasing. The exceptions were increases in inventories (business probably expected more sales than they got) and sales of software grew.
The second one is the disappointing one. Government spending dropped so much that it subtracted 1.09 percentage points from the growth rate. In other words, instead of the weak 1.8% growth rate, we could have had at least a 2.9% growth rate if only we had kept government spending unchanged. Instead we have been cutting government spending like mad. The federal government’s 2009 stimulus bill is over. The spending’s gone and now total spending is declining. More significant is that state and local governments are cutting spending big time. And state and local governments are cutting business taxes so that they have cut to spending even more.
It’s really not a surprise. We’ve known for at least 75 years that cutting government spending is contractionary – it slows the economy. Yet our so-called leaders in Washington persist in cutting right now at a time when the economy needs help, not hindrance. All the first quarter numbers have proven is that, yes, contractionary fiscal policy (cutting spending and cutting the deficit) is indeed contractionary. Well duh. What is amazing is how so many politicians and businesspeople and bankers keep claiming that somehow, someway, if we cut spending and the deficit, some magic “confidence fairy” will inspire the entire economy to grow despite a lack of demand.
As Brad Delong put it:
Contractionary fiscal policy is contractionary.
With overall government spending on the decline and with severe aftershocks from the Japanese earthquake and rising oil prices, we’re down-bound again. Buckle up.