Friday's news that U.S. gross domestic product grew by only 2.5 percent came as a disappointment. After all, that performance not only fell short of the consensus expectation of three percent GDP growth, but was aided by a one-time bump for inventory expansion deferred from the last quarter of 2012. And while the strengthening housing market was a bright spot, those gains were offset by the contraction of government spending that on average has slashed half a point off GDP each quarter since early 2010. As it turns out, after years of austerity by state and local governments, Uncle Sam, too, is holding back U.S. economic growth.
As Floyd Norris explained in the New York Times, the U.S. hasn't seen this kind of contraction since the post-Korean War demobilization of the mid-1950's:
The G.D.P. report released Friday states the total government part of G.D.P. - federal, state and local - came to $3.0306 trillion in the first quarter of this year. That is 0.01 percent below the $3.0309 trillion recorded four years earlier.
Those are nominal figures, not adjusted for inflation...On a real basis, the decline was 6.5 percent.
And that kind of drag, Jared Bernstein warned, is offsetting the double-digit expansion the housing sector has enjoyed for three straight quarters:
Housing continues to be a bright spot as residential investment was up almost 13% on an annual basis. Housing has now been a positive contributor to growth for two-years running, adding 0.3% to the 2.5% growth rate for the first quarter.
But the government sector more than offset housing's contribution, shaving 0.8% off of the growth rate, with across the board declines in defense, non-defense, and state and local public spending. Since 2010q1, the public sector has, on average, taken half-a-percent from real GDP growth per quarter.