A Preliminary Reading of the GDP Report

This morning, the Commerce Department published the much-awaited first look at US second-quarter GDP. You’re going to hear in the news that the recession is officially over, because the economy is reported to have shrunk in Q2 at a 1.0 percent annual rate. This compares with 6.4% in the first quarter. The report also includes a large downward revision to the Q1 number, as well as downgrades to consumer spending statistics for 2008.

Exactly what does it mean to say that the economy shrank by 1.0 percent in Q2? It’s a comparison of the value of the nation’s economic output between Q1 and Q2, expressed as an annualized percentage. The economy got smaller in Q2 compared to Q1, but at a much slower rate than it had declined in Q1 from Q4 ’08. There’s a limit to how far you can keep declining. The economy is no longer in free-fall.

Financial markets are taking this report as borderline bad news, however. The thing that jumps out of the report is that all the improvement in the economy (which is to say, the decline in the rate of decline) is due to government spending at all levels. Consumers aren’t spending more. Rather, they’re saving more.

So are we creating the conditions for a return to private-sector growth? The answer isn’t necessarily no. I think we’re creating the conditions to broadly transition the economy from a consumer-directed one to a government-directed one. The vitality and dynamism of such an economy will be far less than what Americans are used to, but that doesn’t mean we won’t have growth.

I hope you work for a defense contractor or government-funded healthcare provider, though. (Government spending on defense rose over 10% in Q2.) It’s also going to be very, very good to work for a government, since civil servants will get (and keep) gold-plated benefits, while private employees will get more uncertainty.

I’ve been saying this for five months now, in this space and elsewhere: this outcome perfectly matches the on-the-ground trends I’ve been seeing in my own businesses this year. Defense companies and health companies are spending. The bailed-out financial companies are spending. The governments are spending.

Everyone else is cutting.

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