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Government spending and net exports in the third quarter of 2008 may have created a rosier picture of the real Gross Domestic Product (GDP) than private domestic activity would indicate. Even so, the news is not good. GDP fell by 0.3 percent in the third quarter of 2008, the second time in the past 12 months GDP growth turned negative. This summary measure of GDP masks substantially different growth rates among its four components, which are shown in the Chart I.
Consumption (spending by households on goods and services), makes up the lion’s share of GDP. This share has been consistently growing since early 1980s and has an enormous impact on the aggregate. The fall in consumption in the third quarter removed 2.25 percentage points from GDP growth. Government spending has been the second largest component of GDP since the early 1950s and has fluctuated between a 15 to 23 percent. In the past ten years, the share of government spending in GDP has been rising, and currently stands at 20.4 percent, the highest level since 1991. During the same period, the share of private investment (spending by firms on equipment and structures) which has fluctuated between 12 and 20 percent of GDP, decreased. It currently stands at 13.9 percent, the lowest level since 1992. The numbers suggest that government spending is replacing private investment as factor in the GDP. The growth rate of government spending might accelerate in coming quarters through various fiscal stimulus efforts. But the question remains: How fast would the economy grow if the government was not raising its spending? Another component of GDP, net exports (exports minus imports), has steadily grown since 2005, stimulated by a weakening dollar. Recent weeks have seen substantial appreciation of the dollar, which will exert a downward pressure on net exports. Growth in this area is likely to diminish because of the global spread of recession. GDP growth in the U.S. will suffer as a consequence. As with government spending, the growth in net exports raises a disturbing question: How much of economic expansion comes from domestic, instead of foreign, sources? Chart II shows the actual growth rate of real GDP since 2000. It also shows the growth rate of private output without the contribution of government spending, as well as the growth rate of private domestic spending or growth that occurs without the contribution of either government spending or net exports. In almost every quarter since 2000, private output grew more slowly than total GDP because government spending was growing during this time. In the third quarter of 2008, private output fell by 1.4 percent, or as much as it did during the worst quarter of the 2001 recession. Private domestic spending fared even worse. In the third quarter of 2008, private domestic spending fell by 2.5 percent, the largest fall since 1991. If net exports had not grown, GDP growth in 2007 and 2008 would have been reduced by a percentage point or more. According to this measure, the GDP would have been contracting since the fourth quarter of 2007, and by now the economy would have been in an obvious recession for about a year.
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