The Corner

Look at That: The Economy Isn’t Growing as Fast as It Was Announced

According to a revised Bureau of Economic Analysis estimate about GDP growth in the 3rd quarter, the economy grew by 2.8 percent, rather than the 3.5 percent previously announced.

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 2.8 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Donald Marron has a cool chart that helps see where the growth is or isn’t coming from.

How We Got 2.8% GDP Growth in Q3

That being said, we ought to be realistic/careful about GDP numbers. First, the Gross Domestic Product (GDP) numbers include government spending. So, when the government pumps thousands of billions of dollars into the economy, it will look as if GDP is growing.

This is made worse by the fact that the way the GDP accounts for government spending is totally biased: It assumes that if the government is spending $200,000 on a contractor to repave a road in the middle of nowhere, it will create $200,000 of genuine economic value. By contrast, GDP measures are tougher on private-sector spending. As my George Mason university colleague Garett Jones explained to me recently:

So if Exxon Mobil pays an engineer $200,000 per year, that only shows up in GDP if the engineer finds an extra $200,000 of oil to sell, or builds a new machine that sells for $200,000, something like that. So our GDP measures of “government spending” are awful — and when the government is in a race to spend money as quickly as possible, these measures are going to be even worse than usual.

This is an very important point, especially when we think of this particular data. First, the current dollar GDP increased $125 billion in the third quarter. In the same time period, the government injected about $174 billion dollars into the economy in the form of personal tax cuts, unemployment assistance, student aid and nutritional assistance, and grants. In other words, the amount of cash the government injected in the economy exceeds the current GDP increase.

Another point: The GDP doesn’t capture any changes in personal stock benefits. This is key, because high-ranking executives are getting the majority of their compensation from that. That’s got to be looking pretty bad right now. But the GDP doesn’t capture that.

In the end, what the numbers are saying is that government spent tons of our money and didn’t get much in terms of true economic growth. When the government stops pumping cash into the system, things are likely to look pretty bad.