With headlines like “Economy: Here comes the sun”, one might be led to believe the GDP numbers were rosy. According to Bloomberg, the consensus for GDP ranged from -2.8% to .7%. The actual rate of contraction was calculated to be -1%.
Interestingly enough, in the plethora of articles I have read concerning GDP today, the consensus for economists had supposedly been -1.5%, not -.7%. I haven’t been able to find this supposed consensus anywhere on the web. The reason this is important is because the -1% decline in GDP is greater than the consensus prior to the release of the most recent calculation of GDP, which means we’re worse off than we originally thought.
To really understand what is happening with GDP, we need to look a bit more closely at the actual statistics themselves. I have outlined what I believe are the most important points below (percent changes from previous quarter):
- Consumer spending dropped by 1.2%
- Government consumption expenditures and gross investment increased by 5.6% (Federal +10.9%, National defense +13.3%, Nondefense +6%, State and Local +2.4%)
- Disposable personal income increased by 4.6% (current-dollar measures)
- Prices of goods and services rose by .7%
- Prices less food and energy rose by 1.1%
The drop in consumer spending as well as the increase in disposable personal income is exactly what the economy needs to set itself back on a sustainable path. However, the increasing government expenditures should be of concern. We should never trade short term gain for long term pain like the govnerment is trying to do. One interesting point I was unaware of is how national defense is counted positively towards GDPb– the last time I checked, blowing up bridges and rebuilding them in another country doesn’t do us any good.
In the end, what these numbers show us is that individuals are following the correct course of action by taking on less debt through consumption. Unfortunately, our government refuses to follow suit.Published in