US GDP First Quarter 2009
The good news and the bad news
May 4, 2009
Fred Foldvary, Ph.D.
Economist

The gross domestic product of the United States fell sharply in the first three months of 2009, but shows signs that the recession is decelerating. The national income account published by the Bureau of Economic Analysis put US GDP at $14.075 billion (thousand million) for the first quarter of 2009 (January through March), for an annual recession rate of 6.1%, less than that of 4th quarter GDP 2008, which had fallen 6.3%. The numbers are subject to revision, but they indicate that rate of decline is no longer getting more negative.

The spending categories indicate the coming end of the recession. Personal consumption expenditures rose at an annual rate of 2.2%, after falling 4.3% the previous quarter. Especially significant is the spending for durable goods such as furniture. Spending for durable goods fell by 22.1% in 4th quarter 2008 and then rose by 9.4% in 1st quarter 2009. Spending was also up for services and nondurable goods despite higher unemployment.

The big negative in national output continued to be economic investment in capital goods. Fixed investment, the construction of buildings, fell by 38%. With the huge inventory of empty houses, construction will continue to decline. Falling investment drove the economy down, while greater buying by households will pull it up. When sellers see inventories falling, they will then order more goods, which will stimulate investment.

With much of the rest of the world also in recession, US exports fell by an annual rate of 30 percent. Imports fell even more, by 34 percent, so the effect of the change in net exports is to increase GDP, since exports add to GDP while imports get subtracted. What that means is that more of the household purchase of goods and services was for domestic production rather than imported goods.

Government spending decreased in the first quarter. While nondefense federal spending was up, military spending fell at an annual rate of 6.4 percent, after a big increase in 2008. State and local government spending fell by 3.9 percent, as state revenues are down, and many states have laws requiring a balanced budget. However, as federal spending accelerates this year, total government spending will most likely rise in the next quarter.

The price of copper is a good indicator of economic growth. Copper is needed for wires, so when there is more global investment in buildings and machines, the price of copper rises, and in recessions, the price falls. The price of copper bottomed in December 2008 and has been rising since then, indicating that the global economy is turning around.

It is impressive that US household spending was up even though savings also increased and the banks held on to much of their cash. The 55 million Americans receiving Social Security transfers got a 5.8% raise 2009, which is helping to boost spending.

There are still big negatives that will continue to drag the economy down, even if at a lower rate of decline. The banks are still suffering from loan defaults. Commercial real estate mortgages are in trouble as enterprises cut back and shut down. Many personal loans, especially credit card debt, are delinquent, and lenders are making up for this by raising fees. The federal rescues and bailouts will provide relief, but at the cost of making federal debt much greater, which eventually will endanger the credibility of the US government, aside from incurring ever larger interest payments.

Unfortunately, most folks do not understand the first fundamental law of science, that correlation is not causation. Government officials will correlate their rescue policies with the coming economic recovery, and few people will demand that officials prove the cause and effect. The looming liabilities of the federal government are so astronomic that only a radical cure, a shift from punitive taxation to economy-boosting land value taxation, can save us, but that requires a radical thinking shift that few people are willing to consider.

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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.