CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Data Bytes GDP Bytes Government Spending Supports GDP Growth in 2nd Quarter

Government Spending Supports GDP Growth in 2nd Quarter

By Dean Baker

July 31, 2009

The stimulus boosted the economy in the 2nd quarter, but we still face double-digit unemployment for years.

GDP shrank at a 1.0 percent annual rate in the second quarter, as the effects of the stimulus began to be felt. The government sector added 1.12 percentage points to growth. Most of this growth (0.82 percentage points) was at the federal level, but the stimulus allowed for a modest 2.4 percent growth in state and local spending, which added 0.3 percentage points to growth for the quarter. By contrast, the first quarter saw a 0.19 percent contraction of the state and local sectors.

The tax cuts and benefit increases in the stimulus, which began to kick in at the start of the quarter, almost certainly prevented consumption from falling more than it otherwise would have. Consumption fell at a 1.2 percent annual rate in the second quarter. As a result of the tax cuts and benefit increases, disposable personal income rose at a 4.6 percent annual rate in the quarter, even as wage income fell at more than a 5.0 percent annual rate.

All areas of investment continued to decline, although the rate has slowed from the first quarter. Investment in non-residential structures, which had fallen at a 43.6 percent annual rate in the first quarter, fell at just an 8.9 percent annual rate in the second quarter. This decline is likely to continue in future quarters, as more projects are completed. With considerable over-capacity in most areas of non-residential building, there will be little reason to start new projects.

Equipment investment fell at a 9.0 percent annual rate. With new orders for capital goods continuing to fall through the 2nd quarter, there is little prospect that this sector will turn around before the end of the year. Inventories continued to shrink, subtracting 0.83 percentage points from 2nd quarter growth, though considerably less than the 2.36 percentage-point drag in the first quarter.

Housing again contracted sharply in the quarter, falling at a 29.3 percent annual rate, which is an improvement from the 38.2 percent rate of decline in the first quarter. Housing is now just 2.4 percent of GDP, the lowest point in the post-World War II era. While it is unlikely to sink much further, there is little hope of a sharp bounce back in the housing sector, which had been the fuel for prior recoveries. There are enormous inventories of unsold housing by every measure, with the vacancy rate still standing at a record level. High unemployment and underwater mortgages will keep foreclosures at close to an annual rate of 2 million. And mortgage rates are almost certain to go up rather than down.

The 15.1 percent rate of decline of imports substantially outstripped the 9.3 percent decline in exports. As a result, trade added 1.38 percentage points to growth in the quarter. However, this is likely to be reversed in the third and fourth quarters. As firms start to rebuild their inventories, they will increase their imports. As a result, in the second half of the year, inventories are likely to switch from being a drag on growth to being at least a small positive. At the same time, the trade balance will likely deteriorate, with trade again being a drag on growth.

It would be very difficult to paint a positive picture on this GDP report. The rate of decline is slightly less than had generally been expected, but this is partly attributable to the fact that the first quarter decline was revised upward by 0.9 percentage points. The quarter’s numbers would clearly have been much worse had it not been for the stimulus, but it is important to note that the impact of the stimulus was approaching its maximum level in this quarter.

The tax cuts and benefit increases from the stimulus were already largely in place this quarter. With nominal wage growth having almost completely stopped (according to the BLS Employment Cost Index, private sector wages grew at just a 0.2 percent rate in the quarter), it is virtually certain that disposable income and consumption will decline through the rest of the year. State and local spending is likely to contract in future quarters. Housing and investment may level off, but there is no sector of the economy that will provide any substantial boost to the economy.

Dean Bakers is Co-Director of the Center for Economic and Policy Research. CEPR’s GDP Byte is published quarterly upon release of the Bureau of Economic Analysis' report on the Gross Domestic Product.

Combined Federal Campaign #79613




Latin America

Social Security


Union Membership




Displaced Workers