Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

How Government Spending Really Fuelled Third-quarter U.S. GDP

Friday, November 2nd, 2012
By for Profit Confidential

According to the Bureau of Economic Analysis (BEA), the U.S. economy grew at an annualized rate of two percent in the third quarter. GDP in the second quarter of 2012 was only 1.3%. (Source: Bureau of Economic Analysis, October 26, 2012.) U.S. GDP in dollar value is on track to increasing to $15.8 trillion this year.

The increase in the GDP is certainly good for the U.S. economy, but why it increased in the third quarter is intriguing.

Here is what happened in the third-quarter GDP that the mainstream media missed:

GDP in the U.S. economy is calculated by looking at specific factors, such as consumption by consumers, government spending, and net imports over exports.

In calculating third-quarter GDP, there was an increase of 9.6% in government spending and investments—in the previous quarter, there was a decrease of 0.2% in government spending and investments. National defense spending increased by 13.0% in the U.S. economy in the third quarter of 2012, compared to a 0.2% decrease in the second quarter.

On the other hand, personal consumption in the U.S. economy increased in the third quarter by a mere two percent. Exports actually fell by 1.6% from an increase of 5.3% in the second quarter, and imports also fell 0.2% in the third quarter from an increase of 2.8% last quarter.

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Factories in the U.S. economy are still far from running at full speed. In August, industrial production in the U.S. fell 1.4 % from a rise of 0.7% in July. In September, it increased only 0.4% from the decline in August. (Source: Federal Reserve, October 16, 2012.)

What all this data shows is that the increase in third-quarter GDP was stretched by government spending. The government spent more, and the GDP rose. If you took the increase in government spending out, the GDP wouldn’t look as rosy as it does.

But the government can’t continue to spend at the speed it did in the third quarter.

The U.S. economy is weak; there have been no structural changes to the economy. Since 2010, our GDP has seen growth of 10.6%. (Source: Bureau of Economic Analysis, October 26, 2012)—excellent growth, some would suggest. But our national debt in the same period has grown more than 30.5%—from $12.3 trillion at the beginning of 2010 to $16.1 trillion at the end of September 2012. (Source: United States Department of the Treasury, October 26, 2012.)

On the surface, it’s a good sign that our GDP is growing—but that growth is being fuelled by debts growing faster than what we make. The U.S. economy is becoming the family that earns $1.00 and spends $1.50. In the short term, we might be alright; but in the long run, raising GDP by increasing government spending is not sustainable.

Where the Market Stands; Where It’s Headed:

Third-quarter earnings reports paint a poor picture of revenue and earnings growth for U.S. corporations going forward. Take out government spending from the third-quarter GDP numbers, and we see the U.S. economy slowing alongside the economies of the eurozone and China.

We are nearing the end of a bear market rally in stocks that started in March of 2009.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in Profit Confidential, November 13, 2006. Michael was one of the first to predict a 2007 U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles

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