Friday, August 14, 2009

Government and net exports are now the new drivers of U.S. GDP

Over the past two years there has been a very significant shift away from the traditional driver of U.S. economic growth--personal consumption--to Government investment and net exports.

While Personal Consumption is still the largest line item in GDP, contributing in real terms about 71% of the overall total, it has grown only 2% in the past two years. On the other hand the combined contributions from Government and net exports have grown by over 20%.

This is where I think many of the analysts have it wrong. They continue to look at personal consumption and they're wringing their hands because they don't see anything out there that will significantly boost household spending. However, they are missing the big picture because the new drivers of the economy have clearly become government and net exports.

Will the economy look different as a result of this change? You bet!

For one thing, Americans will be far less rich and our standard of living will decline relative to the rest of the world going forward. That's because government spending will be constrained and we won't be able to make all of the necessary investments due to fears of deficits and "lack of funds" (even though both concerns are unrealistic).

The second reason is, more and more of our product will go to the benefit of foreigners. THEY will be the ones enjoying the fruits of our labor! We'll get some non-convertible currency in exchange and, yes, it will reduce our trade deficit and stop the decline in the dollar, however, that won't be enough to sustain the very large standard of living advantage we have enjoyed over other nations for so long.

In the end, we will see our economy grow, albeit at a slower pace, but that is what our leaders want because they see the world full of "imbalances" that must be corrected. And according to polls, so do most Americans.

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