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The Risk of the Cliff in one Paragraph….

I liked this paragraph summarizing last Friday’s GDP report since it so succinctly summarizes the balance sheet recession and the risk of the fiscal cliff (via WSJ):

It is hard to look at today’s report and miss the contribution provided by the government. With defense spending surging, overall government spending contributed 0.7 ppts to the GDP figure, the largest contribution since 2009 when the recovery was first taking hold… Prior to the current expansion, 2.0% growth wouldn’t be celebrated, it would have been feared. Personal consumption is a much smaller contributor to GDP growth during the current expansion while government consumption, which has normally been a boost to GDP, has been, outside of this quarter, a drag on growth. With net exports still dragging on GDP, it’s been private investment that’s picked up the slack and that’s why the fiscal cliff is so very concerning. If businesses slow down, as they did this quarter, then government has to pick up the slack. –Dan Greenhaus, BTIG LLC

That’s pretty concise.  The unusually slow recovery in private investment has meant the government’s needed to play a larger role than usual in the recovery.  Private investment is still crawling out of a deep hole, recovering just half of the peak to trough losses during the crisis.  A substantial decline in government spending at this point would almost certainly send the US economy into contraction.

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