Why United States’ GDP growth doesn’t mean much for the economy

Here’s a forecast: next month the United States’ public and private investment will go up by 2.8%. It matters very little that the spending cuts known as the ‘sequester’ has been going on since March 1st and is slowing the world’s first economy. It is also irrelevant that the Federal Reserve stops buying 70% of the US debt every month in order to boost growth and reduce the unemployment rate. Oil prices will also be out of the equation. So will be the dollar.

If The Corner is able to predict this 2.8% investment increase it’s not because we have a different statistical model than Wall Street banks’ or the IMF’s, but because the US government has decided this situation to happen. The reason is not Barack Obama intervening in the economy, as ultra conservative Tea Party members dread. Simpler than that: in July, the US will start to consider R&D public and private spending as a final investment. According to the US Bureau of Economic Analysis (BEA) preliminary data this will mean a GDP increase of 2.8%. That is, American economy will add around 400 billion dollars to its GDP. Approximately Spain’s 40%.

Unfortunately for US citizens, the BEA will correct its statistics since 1929, which means this GDP increase will only bring joy to economists and other data experts. They will be able to spend their summer discovering -some rather say inventing- correlations, regressions and equations. Economic activity will go on with its weak rhythm since the recovery started four years ago.

Indeed, the greatly controversial ‘sequester’ is having a big impact in the economy and has led many analysts to curb their optimism for the second trimester between 1.5 to 1.8%.

The biggest paradox is that the US public accounts are getting amazingly better although that’s not due to spending cuts but to economic boosting. Congressional Budget Office (CBO) last predictions about the deficit are of a 4% of the GDP for the fiscal years that ends next September 30. It’s a spectacular fall since last fiscal exercise the US was 7% in the red numbers and last February the CBO forecasted a 5% deficit for this year.

Economic stimulus is responsible for 93.5% of this deficit reduction because it has increased collection. The rest comes from tax increases and the so-called ‘sequester’.

This R&D inclusion won’t change the US panorama: the recovery will still go on slowly and the families’ biggest income source being loans obtained using their homes as a guarantee. Meanwhile the inflation index that the Fed is using (private consumption deflactor) is of 0.8%, its lowest level since 2008. The Fed has set the ideal for this index in 2%, then 2.5% in 2012 when it launched its massive debt purchase program. And yet the index continues to fall, which means a small but real risk of deflation in the future.

In this terms, it doesn’t seem likely that the US monetary policy -the only one being in place since the fiscal policy is blocked in Congress- will change much this summer. That is the paradox: in July the US’ GDP will go up although the economy will remain the same.

About the Author

Pablo Pardo
Pablo Pardo is Washington DC correspondent of El Mundo. Journalist especialized in International Economics and Politics.

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