Per AP, Tepid GDP Growth Largely Due to Government 'Budget-Cuttting'

In the first quarter of 2012, the federal government spent $966 billion. That's 10% more than the $877 billion spent during the previous quarter, and 2% more than the $949 spent during the first quarter of 2011.

Yet the party line Friday evening from Christopher Rugaber and Paul Wiseman at the Associated Press, aka the Administration's Press, is that economic growth in the first quarter, which the government preliminarily told us yesterday was an annualized 2.2% (trailing consensus estimates of 2.6%), was so mediocre because of "government budget-cutting." A closer look indicates that if anything, they should have tagged it as defense budget-cutting and never did; the rest of government spending continues to balloon out of control. The pair's opening six paragraphs follow the jump.


Also note the Animal House-imitating "all is well" opening sentence of the AP pair's report (bolds are mine):

Growth slowed at year's start but some see rebound

Don't panic yet. The government reported Friday that the economy got off to a tepid start this year, but that doesn't foreshadow a repeat of the near-standstill that happened in 2011.

"The economy is firmly on a growth trajectory," said Sung Won Sohn, an economics professor at California State University's Smith School of Business. "The first-quarter slowdown will be temporary."

Still, the January-March report was discouraging.

Economists had expected gross domestic product - the broadest gauge of economic output - to expand at a 2.5 percent annual rate for the first three months of the year. Instead, the Commerce Department said it was 2.2 percent, mainly because of government budget-cutting and a slowdown in business investment.

And some of the January-March growth, meager as it was, probably came at the expense of the current quarter. An unseasonably warm winter pulled car buyers into showrooms earlier than usual.

The same was true for housing construction. That's one reason it jumped at a 19 percent pace from January through March.

I'll give the AP pair credit for finding an economist who seems to have a pretty good predictive track record, but that's about where it ends.

That's because two of the three bolded specifics in the duo's dispatch above are wrong. The first is that they assumed, or at least seem to want readers to assume, that government's impact on GDP is directly related to overall levels of government spending (i.e., its "budget"). That is hardly the case. Second, they equated "residential fixed investment" contained in the GDP report, which indeed increased by an annualized 19% during the quarter, with "housing construction." The two terms are hardly synonymous.

Yesterday's full report from the Bureau of Economic Analysis showed that government at all levels was a 0.60-point drag on GDP during the quarter. Three-fourths (0.46 points) of that drop came from Uncle Sam, and almost all of that (0.44 points) resulted from reduced consumption expenditures and investment in national defense, which fell by an annualized 8.1%. Per Treasury Department reports, defense spending overall is down by about 2% through the first six months of the current year compared with the previous year. Such spending during the most recent quarter was down by over 5% compared to the previous quarter.

As seen in this graphic, the rest of the government increased its spending at an annual rate of 13.9% during the quarter compared to the previous quarter. Though it's true that certain disbursements relating to April were paid on the last Friday in March, the increase would still be over 9% if they were assigned to the current April-June quarter.

Rugaber and Wiseman never told readers that over 70% of federal spending is not included GDP, because it consists of transfer payments, employee payroll and benefits, and many other items which aren't GDP-repated purchases of goods or services or "investments." Federal spending unrelated to GDP continues to explode. Snarkily stated: "Budget-cutting," schmudget-cutting.

The housing-related error is also particularly egregious, on two fronts. First, their "19% pace" description is an annualized figure. The actual increase was only about 4.5%, and I believe most readers won't deduce that. More fundamentally, the "residential fixed investment" figures in the GDP report reflect home improvements as well as new homebuilding. Most people don't think of sprucing up the kitchen as "housing construction," and it's not. But Rugaber and Wiseman seemed to want readers to believe that new homebuilding is really going gangbusters, when it most certainly is not -- so they never made the distinction.

The AP pair's clear terminology errors conveniently play into Obama campaign memes: first, that government "cuts" are hurting the economy, when the predominant federal government still hasn't cut overall spending from levels that are 35% or so higher than just five years ago (and where it is trimming at all, it's in defense, which is a questionable choice as the only priority); and second, that the housing industry is undergoing a meaningful recovery, which it isn't.

The weakness in business investment is where the big problem lies in generating sustainable growth. Rugaber and Wiseman barely addressed that:

Businesses splurged on software and equipment at the end of 2011 because of an expiring tax break. That stole economic activity, in effect, from the first quarter. Companies will probably resume spending again later this year.

For what it's worth, I'm not seeing a lot of willingness to resume spending in my corner of the world.

The bigger problem is that the Obama administration seems singularly disinterested in encouraging business investment, and is working on many fronts to discourage it (see oil, gas, fracking, coal, and regulatory overreach in general). Of course, the AP pair never went there.

Cross-posted at BizzyBlog.com.

Tom Blumer
Tom Blumer
Tom Blumer is a contributing editor for NewsBusters.