Trump Economy Dependent On Stimulus-Spending (#GotBitcoin?)
Economists expected greater boost after 2018 budget deal; muted growth only partly explained by lagging federal outlays. Trump Economy Dependent On Stimulus-Spending (#GotBitcoin?)
The economy was supposed to get a lift this year from higher government spending enacted in 2018, but so far much of that stimulus hasn’t shown up, puzzling economists.
Federal dollars contributed significantly less to gross domestic product in early 2019 than what economic forecasters had predicted after Congress reached a two-year budget deal to boost government spending. While military spending has tracked with projections, spending on nonmilitary programs has lagged.
Spending by consumers and businesses are the most important drivers of economic growth, but in recent years, government outlays have played a bigger role in supporting the economy.
The level of the federal component of GDP in the first quarter of 2019 was $78 billion, or 0.4%, lower than what forecasters expected it would be following the February 2018 budget deal, Ernie Tedeschi, an economist at Evercore ISI, estimated.
The government is spending much less on disaster relief than it did in fiscal 2017, and a partial shutdown temporarily stalled outlays in January. Those factors explain about one-third of the missing stimulus, Mr. Tedeschi said. The rest appears to be slower spending by the federal government than previously estimated.
Economists are now wondering whether government spending will catch up to boost the economy later in the year—and prove that early stimulus estimates weren’t too optimistic after all.
If government spending were to catch up in the second quarter, it would add 1.6 percentage points to GDP growth that quarter, Mr. Tedeschi estimated. But he cautioned that a big share of that spending is unlikely to materialize.
“We think that little-to-none of the gap from slower spend-out will ultimately come back,” Mr. Tedeschi said in a note to clients last week.
The answer has important implications for the economic outlook, which has weakened this year as trade tensions intensify and global growth slows.
The path for government spending is one of several fiscal-policy unknowns clouding the outlook for 2019. Most economists expect separate stimulus provided by the 2017 tax cuts to continue fading this year. Lawmakers also are negotiating where to set federal spending levels when the current budget deal expires in October. And they must raise the federal borrowing limit this fall to avoid defaulting on the government’s debt.
The 2018 bipartisan budget deal provided nearly $300 billion more for federal spending in fiscal years 2018 and 2019 above spending limits set in 2011.
The rate at which the government actually spends the money—providing a boost to economic output—varies depending on the type of outlay. Salaries and benefits are paid quickly, for example, while funding for a new aircraft carrier or bridge could take years to be fully spent.
Shortly after the deal passed, the Congressional Budget Office raised its estimates of what the government would spend in 2019 by $63 billion for nonmilitary programs and $43 billion for military. Since then, the CBO has cut its estimates for 2019 nonmilitary spending in half, while estimates for military spending have remained largely unchanged.
The agency has downgraded its forecast for how much federal spending would contribute to GDP. In April 2018, it projected federal consumption and investment spending would grow 7.5% in fiscal 2019 and continue rising well into 2020. In its January economic forecast, the CBO projected federal spending would start to drop off this summer, and grow 3.8% in fiscal 2019.
Commerce Department data suggests the drop-off actually began at the end of 2018, almost entirely because of weaker nonmilitary spending.
The agency’s latest GDP report showed federal spending on the military climbed following the budget deal, from $759 billion in the first quarter of 2018, to $809 billion in the first quarter of 2019. By contrast, nonmilitary spending rose from $536 billion right before the deal took effect, to $546 billion in the first quarter.
“There’s some kind of increase there, but less than we were looking for” after the budget deal was approved, said Joel Prakken, the chief U.S. economist at Macroeconomic Advisers, a unit of IHS Markit .
Part of the spending miss can be explained by a CBO forecasting quirk: The agency assumed the government would keep spending the same amount on emergencies as it did in fiscal 2017, when several major hurricanes prompted a large increase in disaster aid. That spending slowed in 2018 and 2019.
The CBO has projected the spending pause during the government shutdown, and the related economic effects, would reverse in the second and third quarters.
Mr. Tedeschi also pointed to evidence suggesting agencies may be spending less of the money provided to them by Congress. In its latest budget outlook, the CBO lowered its assumptions about how much money some programs are spending, including international aid and housing assistance, “to better reflect the recent rates at which funding for those programs has been spent.”
Other factors could be at play. The budget deal, which affected fiscal years 2018 and 2019, didn’t come together until almost six months into the fiscal year, which may have complicated agencies’ ability to plan for the increase and spend the money. That means spending could show up later this year.
Mr. Prakken also emphasized the difficulty of estimating how much the government is spending on nonmilitary programs in real time, making the earlier estimates—and the potential for catch-up later this year that would boost GDP growth—highly uncertain.
The government will release its first estimate of second-quarter GDP on July 26. Trump Economy Dependent On, Trump Economy Dependent On, Trump Economy Dependent On