If the U.S. economy was really healthy, the closer you looked at the data, the more signs of real vigor you’d see. What a drag, then, to report that evidence of continued, and even increased bubble-ization keeps abounding under the hood.
Last week, I posted on how the details of the latest government report on the gross domestic product (GDP) and its makeup makes clear that the nation’s expansion today is nearly as dependent on the dangerous combination of personal spending and housing as it was during the previous bubble decade – which of course came to an end with the terrifying financial crisis of 2007-2008. Today the trend I’ll highlight is the economy’s growing reliance on government spending, rather than private sector economic activity, for desperately needed growth.
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As we saw last week, the Commerce Department’s first (of several) estimates of inflation-adjusted growth in the third quarter of this year came in at a dreary 1.50 percent at an annualized rate. And as a result, the economy remained excessively dominated by that toxic spending-housing combination that helped trigger the crisis. But government spending also showed up as a major growth engine. In fact, it was responsible for more of the quarterly increase in economic activity than at any time since the current recovery was in its earliest stages, and government stimulus was still playing an outsized role propping up the economy.
According to the Commerce Department, government spending generated 0.30 percentage points of that 1.50 percent growth – or 20 percent. In other words, had government spending levels simply remained the same, third quarter real annualized growth would have been a mere 1.20 percent. The last time the public sector played such a prominent role was the third quarter of 2009, just after the official end of the last recession. Then, government spending was responsible for 0.48 percentage points of that period’s real annualized 1.30 percent GDP increase – or 36.92 percent. So this spending kept growth from falling under the one percent mark (to 0.82 percent).
In fact, the public sector has now been a net contributor to growth for four of the last six quarters, which hasn’t been the case since the nation was mired in the last, historically painful, recession. To some extent, government’s renewed growth prominence looks like a reversion to an historic mean. For nearly all of the current recovery, reductions in after-inflation government spending had been subtracting from growth.
At the same time, the current expansion is now more than six years old. That is, the economy is more than six years from the days when it arguably needed artificial life support. So even accounting for a return to normal government spending patterns – or at least a halt in spending cuts – you’d think (and hope!) that growth not only would pick up, but that the private sector would be shouldering more of the load. It seems the reverse scenario is unfolding.
One cautionary note needs to be raised. The third quarter’s growth performance was also held back by a big liquidation of business inventories – the biggest in absolute and relative terms since the fourth quarter of 2012. Then, inventory liquidation subtracted a huge 1.54 percentage points from the quarter’s barely detectable 0.10 percent annualized growth. In the third quarter of this year, it subtracted 1.44 percentage points from the final 1.30 percent growth figure, meaning that had inventories simply stayed the same, the economy would have expanded by a much better 2.74 percent annual rate after inflation.
Nonetheless, 2.74 percent growth – after a Great Recession that was the nation’s worst downturn since the Great Depression of the 1930s – isn’t exactly killing it. Moreover, several previous big inventory draw-downs haven’t presaged faster growth during the recovery. That’s because it’s hard to know beforehand whether these decisions are being taken because businesses want to restock their shelves with newer, better goods in anticipation of stronger demand going forward, or because businesses fear that their customers aren’t likely to spend enough to justify inventory levels they have built up.
So far, the continued slow pace of growth signals that the latter explanation has been the most accurate. That’s no guarantee that the recovery isn’t on the verge of picking up (although an especially on-target group of forecasters don’t see that happening in the current fourth quarter). But it does make clear that the heaviest burden of proof is on those who still insist that the economy is getting stronger and sounder – or even that it’s bound to one of these days.