Weak GDP Growth and Fiscal Contraction

The advance estimate for real GDP during the 3rd quarter of 2011 is out showing annualized growth of only 2.5 percent with final sales growing by 3.6 percent (inventories fell). Consumption and fixed investment both grew but the said news is that real government purchases were unchanged. As BEA notes:

Real federal government consumption expenditures and gross investment increased 2.0 percent in the third quarter, compared with an increase of 1.9 percent in the second. National defense increased 4.8 percent, compared with an increase of 7.0 percent. Nondefense decreased 3.7 percent, compared with a decrease of 7.6 percent. Real state and local government consumption expenditures and gross investment decreased 1.3 percent, compared with a decrease of 2.8 percent.

In terms of 2005$, real government purchases were running at an annualized rate of $2508.2 billion in 2011Q3 according to this advanced estimate which is where we were in 2011Q2. This is actually below the $2509.6 billion figure for 2009Q1. Real government purchases peaked in 2010Q3 at $2570.3 billion (a mere 2.4 percent increase) but having been declining ever since. While this decline is most evident at the state and local level, Federal purchases (both defense and nondefense) are below their 2010Q3 peaks.

Our attempts at fiscal stimulus a couple of years ago were meager at best. Over the past year, we have been cutting government purchases. Isn’t any wonder why the Great Recession continues?!