Here’s the predictable Reuters headline on today’s revised first-quarter GDP report: “First quarter GDP revised slightly lower; austerity bites.”
Well, certainly the decline in government spending is bad for the government spending part of GDP. That’s a tautology. It subtracted nearly a full percentage point from the overall GDP number. But to flip it around, real private sector GDP — the part of the economy producing actual consumer-relevant value – rose by a not-so-terrible 3.6%. Here’s the morning note from RDQ Economics:
Nominal GDP growth is slower than ideal, in our view, at around 3½% over the last year. However, slow nominal growth can be attributed to the ongoing downsizing of government spending—especially defense spending—and private-sector nominal GDP growth is running at 4½% over the last year, which is only about ½% point below its ten-year average growth rate before the onset of the financial crisis.
Still, the “growth gap” remains more or less static as the economy continues to grow below the pre-recession trend. (See chart below). Of course, the US would look more EU-like if not for the Fed. That’s why austerity isn’t biting — at least not so hard — RPGDP.
What about the rest of the year? This from IHS Global Insight: “IHS had estimated that growth in the second quarter of this year would come in at 1.4%. We now expect slightly stronger growth — around 1.5% to 1.6%. The strong dynamics of the US private sector point to an acceleration of growth in the second half, with a 3% rate achievable by year end.”