GDP Letdown: Obama Has Failed to Restart Economy

The second most important batch of GDP data before the election was released recently by the Bureau of Economic Analysis. And it’s not very good news for the Obama administration:

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 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent. The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The “second” estimate for the second quarter, based on more complete data, will be released on August 29, 2012.

That will be the most important data, as no other complete GDP data will be out before the election. These preliminary numbers, though, show the same trend as I reported on in April. Back then I noted that:

To begin with, year-to-year inflation-adjusted growth is down. In the first quarter of 2011 the U.S. economy grew by 2.2 percent over the first quarter of 2010. In Q1 of 2012 the year-to-year growth rate is 2.1 percent. If Obama’s recovery policy had worked and put us on a traditional recovery path, we should have at 3+ percent growth by now. We are at the very least one full percentage point below where we should be, provided again that we were on a recovery path. Since the GDP growth rate has actually slowed down marginally, we now have yet another round of GDP data that confirms the utter failure of the Obama administration’s anti-recession policies.

Numbers in the latest BEA report point in the same direction, but with a very interesting touch:

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending.

The stimulus bill has now stopped working on government spending. Hence the drop in contributions from state and local governments to GDP growth. The drop-off was planned – the stimulus money was supposed to be temporary – but the bill was sold as a kick-starter for the economy. We could expect private-sector activity to rise significantly as the stimulus funds tapered off. These numbers for the second quarter of 2012 verify my conclusion in April that no such multiplier effect has taken place.

There is a very important reason why the government spending hike has not stimulated private spending. In order for a multiplier to work, there must be transmission mechanisms in place between different sectors of the economy. Such transmission mechanisms are, e.g., the desire of businesses to invest when they see a rise in orders. If that desire does not exist, there will be no multiplier effect of increased government spending.

Transmission mechanisms within the multiplier exist – Keynesian macroeconomics works – but just as Keynes himself explained in Chapter 16 of the General Theory, they rely entirely on confidence. If consumers and entrepreneurs have no confidence, they won’t respond as intended when government tries to kick-start the economy.

The Obama administration has thoroughly wiped the economy clean of  confidence. That is the main reason why their stimulus bill did not work.

Back to the BEA report:

The deceleration in real GDP in the second quarter primarily reflected a deceleration in PCE [private consumption], an acceleration in imports, and decelerations in residential fixed investment and in nonresidential fixed investment that were partly offset by an upturn in private inventory investment, a smaller decrease in federal government spending, and an acceleration in exports.

That businesses stack up inventories is explained in part by the rise in exports. The deceleration in private consumption has probably surprised parts of the manufacturing industry, which may have repercussions on the labor market in the current, third quarter of this year.

We will have to do with this short note on GDP for now, but do expect a longer, comprehensive analysis when the BEA releases the revised numbers on August 29.