GDP First Quarter 2008
How long can military spending and stocking inventory keep us afloat?
May 1, 2008
Fred Foldvary, Ph.D.
Economist

The U.S. Bureau of Economic Analysis has announced the gross domestic product for the first quarter (the first three months) of 2008. GDP is $14.2 trillion, and the real (inflation adjusted) growth from the last quarter of 2007 was .6 percent. These are preliminary data as of April 30, subject to revision, but let us take these as given and analyze what they imply.

The growth rate of .6 percent implies that the economy was not in recession. It grew at the same slow rate as the last quarter of 2007. The real rate of growth depends on how one measures inflation. If the official calculation underestimated inflation, then real growth was lower.

If we use GDP per capita, then the economy has been in recession since the last quarter of 2007, since U.S. population growth is a bit over one percent per year. But even using the total GDP, the numbers do not indicate a healthy economy.

Personal consumption grew by one percent at an annual rate, but the purchase of durable goods such as furniture plunged by over six percent. The purchase of nondurable goods also fell. Only the purchase of services grew. Perhaps folks are paying more for bankruptcy lawyers, banks’ foreclosure services, movers for those who lost their homes, and storage services for those who now have more stuff than house.

Gross private domestic investment fell by 4.7 percent. This includes a 9.7 percent fall in “fixed investment,” i.e. real estate construction. Residential construction plunged by 26.7 percent. What kept total investment from falling as much as fixed investment was in increase in inventory. An increase in unsold goods can imply future economic contraction.

Exports also rose as the U.S. dollar fell. The 5.5 percent increase in exports a 2.5 percent increase in imports helped boost GDP only a little, since net exports are a small fraction of GDP.

More important in preventing a recession was the 2 percent increase in government spending, most of the rise being a 4.6 percent jump in federal spending, especially the 6 percent increase in military spending. There has been a large increase in US troops and military spending in Afghanistan. The federal government can keep GDP from falling by massively borrowing from abroad and spending the money for war. But this does not imply a healthy economy.

So there we have the explanation of why the economy did not recede in the first quarter of 2008: greater military spending, more goods produced than sold, and higher exports. All this implies that the recession of 2008 will most likely begin in the second quarter. Payroll jobs declined by 20,000 in April; construction jobs fell by 61,000. There is a political limit to how much the military can expand, and greater inventories imply less future production. Exports may continue to rise, but there are not enough exports to offset a continuing fall in economic investment.

The rebate checks going out in May will have only a mild and temporary effect. Many people will use them to pay down debt. To really stimulate the economy, there needs to be a big increase in economic investment, and that would only happen if there are large and permanent cuts in taxes on labor and investment gains. These could be offset by shifting taxes to land value, since land does not run away when taxed. But no major candidate dare suggest this tax shift, since they depend on the campaign contributions of the landed interests.

The challenger Green and Libertarian party candidates are tethered to their ideological poles like a bull who walks around in circles until the rope around his neck is wound tightly around the pole holding the rope. Henry George explained that the bull does not have the wit to unwind his rope, and neither do human beings who could think their way out of our economic difficulties but are too anchored in their ideological traps to do so. Alas, we are now approaching the economic waterfall, and all we can do now is yell “watch out!”

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Fred Foldvary, Ph.D.
Economist

FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.