GDP up due to federal spending

By | October 26, 2012

The Commerce Department published its preliminary estimate of third quarter GDP showing an increase to 2.0% growth vs. the second quarter final number of 1.3%. Tearing into the numbers, government spending and a drop in imports seem to be the largest reason for the favorable change to GDP, while commercial investment, exports and private inventory investment were leading declining values in the final number.

Components of GDP

The largest impact to GDP in the report is the federal government. Real federal government consumption expenditures and gross investment increased at a whopping 9.6% after having decreased .2% in the previous. Defense spending increased 13% and non-defense spending increased 3%. Both segments of federal spending had decreased in the prior quarter.

Autos saw a complete reversal from the second quarter numbers. Declining .47% this quarter after having added .2% in the second.

Exports of goods and services took a dramatic turn as American offerings headed overseas tumbled 1.6% after a 5.3% increase in the prior quarter. Imports declined .2% which, because imports are a subtractive component of GDP, raised the number by an equivalent amount.

The report also shows an acceleration in price increases for consumer products of 1.5% which likely explains all but .5% of the personal consumption expenditures that added to the GDP number. It appears as though consumers only spent more because they had to due to price inflation, not out of renewed confidence in the economy.

Business spending tumbled in the current quarter. After having increased 3.6% in Q2, business cut spending 1.3% on real estate, equipment and software –  a clear sign businesses are unable to grow in the current economic and regulatory climate. This represents the biggest drop in three years.

The Economy’s Effect on Wage Earners

Personal current taxes increased more than $13.2 billion in the current quarter after having risen $20 billion in the second.

While prices increased in the third quarter, real disposable personal incomes (money left over after taxes) slowed. After having risen 3.1% in the second quarter, real income only increased .8% in the third – a disturbing trend if prices continue to climb along with tax demands from the government.

State of the Economy

Several U.S. manufacturers reported dismal revenue numbers and even bleaker views of the near future. Dow, Google, and even Apple missed expectations or lowered guidance in recent earnings reports. Looking at the Commerce Department’s release today, it is obvious that businesses are unable to grow in the current climate.

Personal incomes are decelerating while costs are rising which is squeezing the pocketbook of American families.  American families increasingly dipped into savings to deal with rising costs – something that cannot continue forever.

While the GDP number has increased, the numbers underneath show a much darker picture heading into the fourth quarter.

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