Feel the Stimulus

Last week's release of first quarter GDP figures for the US confirmed what we already knew -- the government sector of the US economy is shrinking, and this is putting a sharp drag on economic growth.

During the first 3 months of 2011 the US economy grew at a rate of only 1.8%. This disappointing figure was substantially the result of cutbacks in government spending. If spending by all levels of government in the US had remained constant, the first quarter GDP growth rate would have been about 2.9% instead.

The following picture shows how much government spending has contributed to - or deducted from - economic growth in the US in each quarter since the start of 2009. Do you see that massive and sustained fiscal stimulus? No, neither do I.

To put this in context, let's take the longer view. The next chart shows government spending on final goods and services, broken into federal vs. state and local spending, since 2001. The shaded area marks the time since early 2009, when we supposedly were the beneficiaries of fiscal stimulus.


Actually, in light of this picture, and particularly considering the steady contraction in state and local government spending since early 2009, I feel almost impressed that the US economy has done as well as it has done against this headwind.

One of the biggest reasons that the US economy has done at all well in recent quarters is the relatively good performance of US net exports. Excluding petroleum imports (which have surged in recent months in dollar value, even though they have remained roughly constant in physical quantities), net exports from the US are doing better now than any time in the past 15 years. And for that we can thank (in part) the decline in the dollar. The following picture illustrates.


The dollar's decline (which essentially happened from 2002 to 2008) has helped to make US exports more competitive. The improvement in the US's net export position is also a reflection of the ongoing rebalancing that had to happen after the bubble years; as individuals in the US have been gradually paying down debts and fixing their balance sheets, this has helped to reduce the international borrowing needs of the US as a whole, which translates into a smaller deficit in net exports for the US.

So, to sum up, the situation seems to be this right now: despite the best efforts of the government sector to torpedo economic growth in the US, the international sector is working hard to help sustain economic growth. It's almost exactly the opposite of what many people would have predicted a couple of years ago.