Government Spending And GDP Growth

The Bureau of Economic Analysis released their initial estimate of US 4th Quarter GDP growth on Wednesday and it wasn’t pretty.

“The U.S. economy shrank at a 0.1 percent annual rate in the fourth quarter, the Bureau of Economic Analysis reports, its first quarterly contraction since the second quarter of 2009.”

“Economists were not expecting to hear that. Before the number was released, they were predicting BEA would say there was modest — 1.1 percent — growth in the last three months of 2012.”

“According to BEA: “the decrease in real [gross domestic product] in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures, nonresidential fixed investment, and residential fixed investment.” The Associated Press says the main factor was “the biggest cut in defense spending in 40 years.”

So you can officially throw out “the economy is improving”, “recovery summer”, “pivot to jobs” and other rhetoric from the Obama White House.  And forget that the US economy has normally seen GDP growth rates in the 4-6% range after a deep recession.  This is the new normal and GDP growth rates of less than 1% or negative are now what we expect from Keynesian economics.

Granted these GDP numbers are usually revised later, sometimes as much as 1 percentage point, but the 4th Quarter GDP numbers could be revised DOWN too!  Remember – The classical definition of a Recession is two consecutive quarters of negative GDP growth so if we see another minus sign on GDP growth 3 months from now we’ll officially be in a new Recession.

Did you catch what one of the reasons was for the drop in GDP?  In case you missed it in the NPR quote from above, Reuters can help (emphasis mine).

“If it were not for the hit from slower inventory growth and the deepest plunge in defense spending in 40 years, the economy would have grown at a respectable 2.5 percent rate.”

Reduced spending by the Federal Governement is one of the major reasons the GDP growth rate was negative!  So it’s come to this….the US economy is dependent on increased spending by the Federal Government.

And that statement, no matter how troubling to Free Market Conservatives such as myself, is actually true in this new age we live in.

Over the past 4 years, US Federal Government spending as a percentage of GDP has increased to levels we have not seen since World War II.  This data can be obtained here and I’ve graphed it below.

spending vs gdp

After World War II the US Federal Government spending was about 18-20% of GDP but after Obama came into office it jumped to 25% of GDP.  Since the GDP total has a larger percentage of the Federal Government component then we can truly say that reduced spending by our Federal Government does impact our GDP.

And that graph only represents Federal spending.  When we add in State and Local government spending we see that total Government spending is over 40% of our GDP!

Gosh, I remember a time when the GDP was more dependent on private industry versus the redistribution of our Federal tax dollars for entitlement programs that consume over 90% of our Federal Tax revenues.

Welcome to the age of Obamanomics!  We are all Socialists now.

newsweek-socialists_now

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One Response to Government Spending And GDP Growth

  1. livinrightinpgh says:

    I’ll tell ya, Cosmo…..the “New Norm” is not appealing in any way, shape, or form. From a once mighty foothold in a capitalist society, we’ve moved well beyond the 50 yard line and are in the red zone of progressive socialism…..

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