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The Worst Best 1st Quarter GDP Report

May 2, 2019

It may be revised downward in the two revisions that will be made to last week’s first quarter U.S. GDP growth report but even if not, this was still a low-quality GDP report. Several one-time factors – lower imports, inventory buildup and higher Pentagon spending were key contributors to the surprising (well above consensus estimate) of first quarter GDP growth. Based on the one-offs, current quarter output is poised to slow. Arguably the single most important sub-component of GDP was soft in the 1st quarter and more consistent with 1 to 1.5% GDP growth. As the accompanying chart shows, final sales to private domestic purchasers rose only 1.3% on an annualized basis, the lowest in nearly a decade. Investment by businesses in equipment managed a meager 0.2% growth in QI. For my friends in the construction industry, fixed investment in private non-residential and residential structures each declined on an annualized basis. Despite the political cheering, I still hold to a sub 2% GDP growth in 2019.

Q1 2019 GDP

Categories: GDP, GDP Growth, U,S, Economy, U.S. economy
Tags: GDP, GDP growth, U.S. economy

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The Shrinking U.S. Deficit

May 1, 2013

Annual budget deficits since 2009 have been the largest in a generation. The deficit-to-GDP ratio, which averaged 2.5% from 1980 to 2007, peaked at 10.1% in 2009 as the recession reduced tax revenue and spending rose with the economic stimulus package. There is still a long way to go but the deficit to GDP ratio has improved each year since 2009 and will likely continue to do so for the next few years. The chart below shows a reasonable proxy of the official federal deficit – it shows the 12-month moving average of the difference between federal revenues and federal spending. Over the past year this deficit estimate has improved by an average of $28-$30 billion per month, much better than the CBO’s 2013 deficit projections.

The deficit is shrinking because of a combination of higher revenues and slower spending. To this point deficit reduction has largely been the result of higher tax revenue resulting from an improving economy, the expiration of the payroll tax holiday (worth about $135 billion this year), and higher tax rates for upper income individuals but spending reductions are beginning to play a larger role.

Lower deficits and a reduction in the national debt as a percentage of GDP will help economic activity in the long run. Although there are many short-term factors that influence the relationship between federal debt ratios and GDP growth, over the longer-term, higher debt levels are associated with slower GDP growth and lower debt levels are associated with higher GDP growth.

The deficit is contracting faster than expected, but the goal of deficit reduction can have negative implications from either excessive taxation or spending cuts that significantly impact demand. The Federal government accounts for roughly 7% of total economic output and has shrunk by an average of about 10% each of the last two quarters. So while the good news is that deficit-reduction is likely to be greater than expectations in the near term, the cost from tax increases and spending cuts will likely lower real GDP growth by about 1% over the next year.