Government Spending, GDP Drops

A 22% decline in government defense spending is being blamed for a 0.1% drop in the country’s GDP in the fourth quarter of 2012, while consumer spending grew at a 2.2% annual rate in the same period. Investment was also up in the fourth quarter, particularly in the housing sector, and overall performance is trending toward an overall GDP gain of as much as 3% over the coming year. Inflation, which was once thought to be a significant threat, actually moved lower and experts note that statistics point to there being no real impact from “fiscal cliff” concerns during the quarter. For more on this continue reading the following article from Economist’s View.

Dean Baker on todays' news the GDP shrank in the 4th quarer of last year:

Falling Government Spending and Inventories Push Growth Negative in Quarter, by Dean Baker: A sharp drop in government spending, heavily concentrated in defense, coupled with a decline in inventories caused GDP to shrink at a 0.1 percent rate in the 4th quarter. Government spending fell at a 6.6 percent annual rate, driven by a 22.2 percent decline in defense spending, subtracting 1.33 percentage points from the growth rate in the quarter. A 40.3 drop in the rate of inventory accumulation reduced growth by another 1.27 percentage points. Without these factors, GDP would have grown at a 2.5 percent annual rate in the quarter.

Pulling out these extraordinary factors, the GDP data were largely in line with prior quarters. Consumption grew at a 2.2 percent annual rate, driven mostly by 13.9 percent growth in durable goods purchases, primarily cars. This number was inflated due to the effects of Sandy, which destroyed many cars, forcing people to buy new ones. Growth in this category will be substantially weaker and possibly negative in the next quarter. On the other side, housing and utilities subtracted 0.47 percentage points from growth in the quarter. This is likely a global warming effect with warmer than normal weather leading to less use of heating in the quarter. (There was a comparable falloff in the 4th quarter of 2011 when we also had unusually warm weather.)

One especially noteworthy item is the continuing slow pace in the growth of spending on health care services, which accounts for almost three quarters of all health care spending. Nominal spending grew at a just a 2.3 percent annual rate in the quarter. Over the last year, nominal spending is up by just 1.8 percent, far less than the rate of growth of GDP, and well below the projections from the Congressional Budget Office (CBO). It seems increasingly likely that we are on a slower health care cost trajectory. The deficit picture will look very different when CBO incorporates this slower growth trend into its projections.

Investment rebounded from a weak third quarter in which non-residential investment actually shrank. This quarter it added 0.83 percentage points to growth, with investment in equipment and software growing at a 12.4 percent rate. Housing continued to be a big positive in the quarter, adding 0.36 percentage points to growth.

Net exports were a modest drag on growth. While both exports and imports fell in the quarter, the 5.7 percent drop in exports more than offset the positive impact of a 3.2 percent decline in imports. The state and local sector government sector shrank at a 0.7 percent annual rate, knocking 0.08 percentage points off growth. Non-defense federal spending rose at a 1.4 percent annual rate.

The inflation hawks will be disappointed in this report with the overall price index rising at just a 0.6 percent annual rate. The core CPE rose at a 0.9 percent rate. Insofar as there is any trend in these data it is toward lower inflation.

One interesting item in the report was a $122.90 jump (85.2 percent at an annual rate) in dividend payouts. This was the result of companies deciding to pay out dividends to shareholders in 2012 when a lower tax rate was in effect on high-income taxpayers.

There is little evidence in this report to believe that the economy will diverge sharply from a 2.5- 3.0 percent growth path, except for the impact of the deficit reductions that Congress is considering or already put in place. Higher tax collections from the ending of the payroll tax holiday are likely to knock around 0.5 percentage points from growth. The sequester, or whatever cuts are put in place in lieu of the sequester, are likely to have an even larger impact on growth beginning in the second quarter.

One item worth noting is the GDP report provides zero evidence that "fiscal cliff" concerns had any impact on growth in the quarter. Consumer durable purchases and investment in equipment and software were the two strongest components of GDP. If worries over the fiscal cliff were supposed to cause people to put off purchases, consumers and businesses apparently did not get the memo.

Nevertheless, with the slow recovery of output and employment all is not well no matter how we spin the numbers. We need more spending on infrastructure to help with the recovery.

This article was republished with permission from The Economist's View.

Parties Differ On U.S. Economic Policy

Opinions about how to repair the economy in the United States vary from one party to the next, but broadly trend either toward reducing debt or spending more to in an effort to stimulate the financial infrastructure. The vast majority of conservative Republicans and a majority of Independents advocate reducing debt, while Conservative and Liberal Democrats favor more spending. For more on this continue reading the following article from Tim Iacono.

There’s nothing really surprising about the results of a new Pew Research poll in which one party favors deficit reduction to boost the economic recovery while the other party favors more spending, but, it is kind of interesting to see the data all in one graphic.

Following the departure of another Republican from the debt ceiling/deficit reduction negotiations, President Obama has injected himself directly into the talks in the hope that some kind of a deal can be struck prior to the debt ceiling deadline on August 2nd. Somehow, the fat tail of a U.S. debt default seems to have grown just a bit fatter.

This post was republished with permission from Tim Iacono.

National Budget Projections Are Scary

Think the Nation's budget deficit is bad now? Just wait a few years, and you might be longing for the days when we only had a trillion dollar budget deficit. This is the depiction that a few bloggers are painting after reviewing President Obama's proposed Budget. For more on this, read the following post from The Mess That Greenspan Made.

Following this item about David Stockman’s views on deficits comes a shocking depiction of where the nation’s finances are currently headed via this story by Robert Murphy at the Mises blog, the chart below originally appearing in this item from Keith Hennesey.

Just as, today, we longingly think back to those days, not so long ago, when the nation’s budget shortfall was only a couple hundred billion dollars, someday, we’ll look back at the current era and long for a budget deficit of only $1.5 trillion or so…

Oh yeah, and the budget projections for the next ten years are just filled with optimistic assumptions about the U.S. economy that many outside the White House characterize as anything from fanciful to dangerously detached from reality.

This post was republished with permission from The Mess That Greenspan Made.

Children Paying The Highest Price Of Excessive Government Debt

With record deficits at both the Federal and State level, the burden for repayment is being pushed to our children in more ways than one. Texas is a prime example of a state that is setting its children up for failure. Economics professor Mark Thoma looks at a recent article by Paul Krugman on the topic in his blog post below.

Budget hawks are confused by the meaning of "putting children first":

Leaving Children Behind, by Paul Krugman, Commentary, NY Times: Will 2011 be the year of fiscal austerity? At the federal level, it’s still not clear: Republicans are demanding draconian spending cuts, but we don’t yet know how far they’re willing to go in a showdown with President Obama. At the state and local level, however, there’s no doubt about it: big spending cuts are coming.

And who will bear the brunt of these cuts? America’s children. ... Consider, as a case in point, what’s happening in Texas, which more and more seems to be where America’s political future happens first.

Texas likes to portray itself as a model of small government, and indeed it is. Taxes are low, at least if you’re in the upper part of the income distribution (taxes on the bottom 40 percent ... are actually above the national average). Government spending is also low. ...

But here’s the thing: While low spending may sound good in the abstract, what it amounts to in practice is low spending on children, who account directly or indirectly for a large part of government outlays at the state and local level.

And in low-tax, low-spending Texas, the kids are not all right. The high school graduation rate, at just 61.3 percent, puts Texas 43rd out of 50 in state rankings. Nationally, the state ranks fifth in child poverty; it leads in the percentage of children without health insurance. And only 78 percent of Texas children are in excellent or very good health, significantly below the national average. ...

It’s not a pretty picture; compassion aside,... how the state can prosper in the long run with a future work force blighted by childhood poverty, poor health and lack of education.
But things are about to get much worse. ... For months, Gov. Rick Perry had boasted that his “tough conservative decisions” had kept the budget in surplus while allowing the state to weather the recession unscathed. But after Mr. Perry’s re-election, reality intruded — funny how that happens — and the state is now scrambling to close a huge budget gap. (...achieved with an overwhelmingly nonunion work force.)

So how will that gap be closed? Given the already dire condition of Texas children, you might have expected ... high-income Texans, who pay much less in state and local taxes than the national average, to be asked to bear at least some of the burden.

But you’d be wrong. Tax increases have been ruled out...; the gap will be closed solely through spending cuts. Medicaid, a program that is crucial to many of the state’s children, will take the biggest hit, with the Legislature proposing a funding cut of no less than 29 percent... And education will also face steep cuts, with school administrators talking about as many as 100,000 layoffs.

The really striking thing about all this isn’t the cruelty — at this point you expect that — but the shortsightedness. What’s supposed to happen when today’s neglected children become tomorrow’s work force?

Anyway, the next time some self-proclaimed deficit hawk tells you how much he worries about the debt we’re leaving our children, remember what’s happening in Texas, a state whose slogan right now might as well be “Lose the future.”

This post was republished with permission from The Economist's View.

CBO Says White House Budget Deficit Projection Too Low

The record budget deficit may be even larger over the next decade than originally projected by the Obama Administration. While the citizenry of the country is concerned about its impact, the bond market has not yet expressed a clear opinion on the long-term effects of the large quantity of debt that the government has taken on, and on how that debt should be priced in the future. See the following post from The Capital Spectator.

It's all about deficits these days. The challenge is figuring out what it all means for the markets, the economy, the man on the street and for politics in Washington. What's crystal clear at the moment is that there's a bull market in red ink. That's hardly a surprise, although the debt estimates continue to creep higher. That latest example comes from the Congressional Budget Office, which published a new analysis on Friday of President Obama's budget outlook. The CBO concludes that the projected deficit for the decade ahead will be $1.2 trillion more than the White House predicts.

The reaction from the Republicans is predictable. "The news today from CBO is clear: The president’s budget will continue to lead our nation into a fiscal catastrophe—an ever worse one than the president’s own numbers suggest," says Paul Ryan (R-Wisconsin), a Republican on the House Budget Committee, via BusinessWeek.

The White House begs to differ, of course, arguing that it's making the best of a bad situation. "That is why even as we increased our short-term deficit to rescue the economy, we have refused to go along with business as usual, taking responsibility for every dollar we spend, eliminating what we don’t need, and making the programs we do need more efficient," the administration's Office of Management and Budget asserted when it released its forecast last month.

Perhaps the question is whether the budget plans are too heavily focused on spending, or weak on raising sufficient revenue to pay for the plans. The answer depends on your perspective. Consider this excerpt from CNNMoney.com:

The CBO cited two big contributors to the jump in debt.

One is the president's proposal to extend the 2001 and 2003 tax cuts for the majority of Americans. The other is the proposal to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax (AMT).

Together those proposals would cost $3 trillion between 2011 and 2020.

"It points out the unwillingness of the administration to raise the revenues to pay for the size of government being proposed," said Robert Bixby, executive director of the Concord Coalition, a deficit watchdog group.

Is the Obama administration a victim of its own optimism? Not necessarily, says Jim Horney of the Center on Budget and Policy Priorities. "It's not that the administration has a rosy scenario, but the CBO is a little less optimistic about income growth," he tells The Hill.

Regardless of one's political views, the rising level of debt is affecting the public's attitude. "More than twice as many U.S. adults (58%) say that debt owed to China is a more serious threat to the long-term security and well-being of the U.S than is terrorism from radical Islamic terrorists (27%)," according to a new a new Zogby poll. What's more, there was little variation by political affiliation. Democrats, Republicans and independents were in agreement by a wide margin that debt was the number-one threat.

The big question is when (if) the bond market's views will change. The benchmark 10-year Treasury remains in the upper 3% range, where it's been since last summer.

The muted outlook on economic recovery is one reason. But the real issue is deciding how long the fixed-income set will stay calm and give the government the benefit of the doubt. There's a compelling argument for thinking that the price of money should stay low in a time of diminished expectations. Unfortunately, that's just an assumption and it's not clear that it's written in stone.

This article has been republished from James Picerno's blog, The Capital Spectator.

Should Obama Be Blamed For The Record Deficit?

Glenn Hall from The Street argues that the blame for the record budget deficit of $1.56 trillion in 2010 should fall to both the democrats and republicans. While Obama will shoulder a lot of the blame for the record deficit, much of the spending is an extension of actions were initiated before he took office. See the following post from The Street.

President Barack Obama sent his proposed $3.83 trillion budget to Congress today, showing deficit spending that goes well beyond the levels set by the previous administration of President George W. Bush.

The Obama budget shows the government spending $1.56 trillion more than it earns from taxes, an increase from $1.4 trillion in 2009. The new deficit projection would be 10.6% of GDP -- almost double the level during the Reagan years.

This will stoke a lot of heated debate about policy choices, stimulus spending, banking bailouts and pork-barrel politics. In large measure, the blame will fall on Obama. This is already being labeled as Obama's deficit (just like it was Bush's deficit before).

The reality is that this is everyone's deficit.

The budget will include billions of dollars to fund the ongoing war efforts in Afghanistan and Iraq -- wars that were started by the previous administration and gladly financed by the Republicans in Congress during their period of control. It will also include the costs of the banking bailout, also initiated under the previous regime but expanded by Obama. And the budget includes stimulus spending that both parties of Congress quickly passed amid the panic of the financial collapse and economic downturn when Obama took office a year ago.

While I'm not inclined to be Obama's apologist, I think we have to recognize that he's only been in office for one year and it took much longer than that for this deficit to grow to this historic level.

That said, Obama's new-found religion about reining in government excess is just words at this point. He's starting to preach but is he practicing? In the state of the union address, Obama said belt-tightening will be needed - just not this year because of the need to create jobs and nurture an economic recovery that remains tentative.

Obama didn't mention the mid-term elections coming up, but it must be on his mind. He can't afford to lose any more Democratic allies in Congress after Republican Scott Brown broke the Democrat's filibuster-proof majority in the Senate when he won the special election to replace the late Democratic icon Ted Kennedy.

We've seen Obama embracing the populist rhetoric with his vilification of the big banks and the big bonuses paid out by the likes of Goldman Sachs (GS Quote), JPMorgan Chase (JPM Quote) and yes, even Citigroup (C Quote). Tapping into that anger may help overcome the growing Republican focus on the deficit as the election rallying point for their party -- at least as far as the tea party faction is concerned.

It will be easy to pan the Obama budget, but the inconvenient truth is that this is more than Obama's problem - it is our nation's problem and both Republicans and Democrats share in the blame and the responsibility for fixing it.

This post has been republished from The Street.

Excessive Debt: A Destroyer Of Great Nations

Moses Kim writes that news of an economic recovery is nothing more than propaganda to distract people from the government destroying the economy with debt. With a record budget deficit for the month of October that included a $17.93 billion payout for interest alone, the national debt continues to spiral out of control. See the following from Expected Returns.

Forget all the hoopla you hear from the mainstream media and focus on reality. We are far, far away from any sustainable recovery. With tax receipts collapsing, and American businesses and consumers on life support, there is really nothing our government can do to stop this economic collapse. Of course that won't stop our clueless officials from trying, and in the process of doing so, destroying the dollar. From the WSJ, U.S. posts $176.6 Billion Deficit for October:

The federal government kicked off fiscal year 2010 by posting its widest-ever October budget deficit, the Treasury Department said Thursday.

The $176.36 billion gap is more than $20 billion wider than the shortfall recorded in October 2008, driven up by lower tax receipts, stimulus-related revenue reductions and consistently high government outlays.

Treasury's monthly budget statement shows receipts were $135.33 billion in October, down 18% from a year earlier and at the lowest level since October 2002. Meanwhile, outlays were $311.69 billion, down 3% from a year earlier and at their second-highest monthly level on record.

So much for "green shoots"- our budget shortfall is already well-beyond crisis levels. The budget deficit in October would have been the equivalent of the annual budget deficit a mere decade ago. Even with all this government stimulus, is unemployment improving? Are new businesses opening? Sans government propaganda, does anyone really "feel" that this recession/depression is actually over?
Debt Reduces Productive Capacity

At the equivalent of 9.9% of gross domestic product, the figure is the widest U.S. deficit as a share of GDP since 1945.

The government paid $17.93 billion in net interest last month on the federal debt. Net interest on the federal debt excludes interest paid on nonmarketable government securities held by federal trust funds, such as Social Security.

The only ways to make up for shortfalls in tax receipts are through higher taxes, debt issuance, or inflation. Study your history books and see that excessive debt has always destroyed great nations. Governments throughout history have taken on the responsibility of trying to "fix" debt crises, and have succeeded only in making the problem worse.

We are experiencing a debt crisis in all sectors of the economy. Overleveraged individuals are being gouged by credit card companies, which means that there is no more money left to organically stimulate the economy and create real jobs. Banks are overleveraged, which means their primary focus will not be to lend to consumers, but to repair capital ratios. And then you have the U.S. government- the most overleveraged entity in the world. There is no doubt in my mind that the cascading effect of debt defaults- from states and municipalities, to individuals and the federal government itself- will wreak utter havoc on our economy.

All of our potential productive capacity is being wasted to service our exponentially growing debt. You just don't solve a debt problem by blindly throwing money here and there, and getting deeper and deeper into debt. It's been tried before in Japan, and that experiment has failed magnificently. It's a sad fact, but our country is being destroyed before your very eyes.

This post has been republished from Moses Kim's blog, Expected Returns.