Q2 Contraction and the Recovery Act

Josh Bivens has an enlightening item up on the EPI website illustrating the bleak state of the economy and the helpful role being played by the American Recovery and Reinvestment Act:


Despite the overall contraction, the fingerprints of the American Recovery and Reinvestment Act could be seen in some aspect of today’s report. Federal government spending grew at an 11% rate in the quarter, adding roughly 0.8% to overall GDP. State and local government spending grew at a 2.4% annual rate, the fastest growth since the middle of 2007. It is clear that the large amount of state aid contained in the ARRA made this growth possible. […]

The consensus of macroeconomic forecasters is that ARRA contributed roughly 3% to annualized growth rates in the second quarter. This means that absent its effects, economic performance would have resembled that of the previous three quarters, when the economy contracted at an average annual rate of 4.9%. In short, the recovery act turned this quarter’s economic performance from disastrous to merely bad. This is no small achievement, but with even more public relief and investments, the U.S. economy could do much better.

In Q3 and Q4 we should start seeing more of the impact of the infrastructure investment money. It also appears to be the case that the balance of trade is moving in the kind of direction that will be necessary to create an internationally sustainable environment. But given the increase in the personal savings rate, the fall in incomes, and the need to readjust trade flows it will probably be a good long time before consumption levels regain their peak 2007 value.


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