The Economy... Still Stinks

The GDP numbers for the second quarter are out today.  Shocker, they're ugly.  Annualized growth was at 1.3%.  Better than 0.4% first quarter, but still far below the rate we need to keep the unemployment rate from rising.  Why did the stagnation happen? Well, part of it was probably a shock to fuel prices in May that impacted growth, and part was the lingering effects of the Japanese tsunami ravaging the global economy.  But if you look at the BEA numbers, the biggest drop in GDP has come from a drop in government spending.  The first thing anyone learns in Macro is the accounting identity that GDP= Consumption + Investment + Government Spending + Net Exports.  The drop is largely in the "government spending" part of the identity as the effect of 2009's stimulus dries up.  So, for those who thought that our problems could be fixed if the government would just cut spending and "boost confidence", take a look at the numbers- we cut spending, and the economy did exactly what the models said it would do: it shrank.