In what should hardly come as a surprise, US third-quarter GDP has once again been revised downward from the initial projection of 3.5% annual growth. The figure was initially revised downward to 2.8%, and now it has been further revised down to 2.2%.
That means the government overestimated the nation's third-quarter economic performance by 37%, a rather large error.
GDP numbers are often revised, seemingly at will, allowing the government to control the message and spin the story. After six consecutive quarters of negative GDP, the government was desperate to create some good news. As it turns out, that news was too good to be true.
Our meager third-quarter growth was largely the result of further government spending, not private sector spending. Auto purchases were in fact undergirded by government support.
Under the latest revision, the government's Cash for Clunkers program now accounts for 66% of the remaining GDP "growth," up from 47% in the initial report. This is an error of $185 billion, which is larger than the $152 billion Bush stimulus package of 2008.
The reality is that this 2.2% growth was fueled by even further government debt, as well as consumer debt. The latter is exactly what got us into this economic malaise in the first place, and the average US household is still overburdened and saddled with debt.
According to data released in July by the Federal Reserve Board, revolving consumer debt in the United States totals about $928 billion.
Federal Reserve surveys suggest that about 75% of households have at least one credit card and 25% have none. If we count only those households that report actually having one or more credit cards, the average household credit card debt is $10,482.
However, the Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income, a burden that many economists believe will take several years to pare down to what is viewed as a more sustainable level of 100%.
When one considers that consumer spending makes up more than two-thirds of the U.S. economy, and about one-fifth of the global economy, you realize it won't be able to play a leading role in any recovery. Seventeen percent of US workers are either unemployed or under-employed.
The federal government has jumped into the breach to try to make up for the resulting decline in consumer spending. But that is only increasing an already whopping federal debt.
U.S. government debt has reached 85% of annual economic output and is showing no signs of slowing; the White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, it has to service all that debt – in addition to current debt – with interest.
Paying down this enormous national debt will eventually require Americans to pay more taxes. That will only hamper consumer spending even further. Consumers will ultimately feel the combined burdens of private and public debt because we all owe a share of the national debt.
A 1998 Congressional Joint Economic Committee study concluded the optimal size of government to maximize economic growth was about 18% of gross domestic product.
However, in May, Business Week reported that, even before this year's unprecedented debt and spending, all levels of government in the U.S. controlled 37% of GDP. Recent federal spending will drive up government’s share to more than 40%.
Our entire economic system is based on perpetual growth. However, there is no real growth; there is only more debt.
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