Spending Cuts Could Hurt Growth in The Second Half

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First quarter GDP came in lower than anticipated. The 1.8% growth rate was the weakest since the second quarter of 2010 and well below the 3.1% growth rate of Q4 of last year.

A close analysis of the GDP report reveals that government spending fell sharply, shaving 1.09% off overall growth. That completely wiped out the 1.01% contribution from business investment.

The drop in government spending was the largest in 28 years. Most of the reduction was attributed to a large drop in defense spending and while Fed Chairman Ben Bernanke said this is likely to be temporary, he could be wrong. That’s because incoming Defense Secretary, Leon Panetta, has signaled further cuts when he takes over from Robert Gates on June 30th. Furthermore, non-defense spending reductions are likely as well.

Republican demands for deep spending cuts belie their history. Of the last five presidents (including Obama), it was two Republican presidents who were the biggest spenders.  The chart below shows the quarter-over-quarter average percentage increase in government spending under presidents Reagan through Obama.

As you can see, average levels of government spending were highest under Reagan, by a huge margin. We had a boom back then. Next was Bush II, then Clinton, then Bush I and last, but not least, was Obama. Average quarterly increases in gov’t spending under Obama have been a miserly 0.7%.

While it’s true that nominal spending has increased under Obama, the percentage increases have been very modest. In contrast, Reagan really put the pedal to the metal.

First quarter GDP came in lower than anticipated. The 1.8% growth rate was the weakest since the second quarter of 2010 and well below the 3.1% growth rate of Q4 of last year.

A close analysis of the GDP report reveals that government spending fell sharply, shaving 1.09% off overall growth. That completely wiped out the 1.01% contribution from business investment.

The drop in government spending was the largest in 28 years. Most of the reduction was attributed to a large drop in defense spending and while Fed Chairman Ben Bernanke said this is likely to be temporary, he could be wrong. That’s because incoming Defense Secretary, Leon Panetta, has signaled further cuts when he takes over from Robert Gates on June 30th. Furthermore, non-defense spending reductions are likely as well.

Republican demands for deep spending cuts belie their history. Of the last five presidents (including Obama), it was two Republican presidents who were the biggest spenders.  The chart below shows the quarter-over-quarter average percentage increase in government spending under presidents Reagan through Obama.

As you can see, average levels of government spending were highest under Reagan, by a huge margin. We had a boom back then. Next was Bush II, then Clinton, then Bush I and last, but not least, was Obama. Average quarterly increases in gov’t spending under Obama have been a miserly 0.7%.

While it’s true that nominal spending has increased under Obama, the percentage increases have been very modest. In contrast, Reagan really put the pedal to the metal.

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