Republicans in the House of Representatives are holding hostage the federal government’s ability to pay for their bills to enact draconian cuts to a wide range of programs related to health care, science, housing and food security. United States Department of the Treasury now warn that the federal government may not be able to pay all your bills on June 1. The economy could suffer significant losses if Congress does not give the government the ability to keep its past promises and pay what it owes to individuals and businesses.
So far, the economy has proven remarkably resilient in the face of major headwinds, notably higher interest rates and increased uncertainty about the political debt stagnation. The Bureau of Economic Analysis reported that the economy grew at an annual rate of 1.1% in the first three months of this year than in the previous three months. Digging below the surface shows an even stronger and stronger economy, at least for now. In particular, households and businesses seem to be taking a longer-term view, which is reflected in where they spend their money. This better illustrates the current resilience of the economic recovery.
Here’s the basic summary of how the economy fared in the first three months of this year. The Bureau of Economic Analysis reported last week that the economy expanded at an annual rate of 1.1% in the first quarter of 2023, down from the 2.6% registered in the last quarter of 2022. Through a separate measure aimed at By capturing the key activities of the private sector – private final sales to private domestic buyers (PFDPs) – the economy actually picked up speed. This measure leaves out changes in inventory builds, exports and imports, as well as public spending, as all three say little about the strength and direction of the domestic private sector. However, this part of the economy grew at an annual rate of 2.8% in the first quarter after remaining flat in the last three months of 2022. The private sector gained strength at the beginning of 2023.
The difference between changes in gross domestic product (GDP) and private sector growth (PFDP) in the last two quarters is best shown by the role that changes in inventory build have played in each quarter. By the end of 2022, companies increased the rate at which they built up their inventories. This added 1.47 percentage points at the global growth rate of 2.6%. In other words, without companies accelerating the rate at which they stockpiled needed goods, the economy would have only grown 1.1% by the end of 2022. Similarly, companies slowed the rate at which they built up their inventories at the beginning of 2023, which subtracted 2.26 percentage points from economic growth. GDP would have grown 3.4% if businesses had continued to build inventories at the same pace as at the end of 2022. These changes in inventory spending obscured underlying movements in the private sector economy in recent months.
Two points stand out related to this movement of the private sector in the first quarter. First, consumer spending accelerated from 1.0% at the end of 2022 to 3.7% in the first three months of this year. The jump was especially pronounced in durable consumer spending such as cars, from a 1.3% drop to 16.9% in the most recent quarter. Durable consumer spending is a critical indicator of how households view the future of the economy. They increase their spending on larger, more durable products if they believe the economy will continue to grow and thus keep their jobs and profits.
Secondly, along the same lines, companies increased their investment spending on structures, especially manufacturing plants and mining operations, at double-digit rates at the end of 2022 (15.8%) and in the first quarter of 2023 (11.2%). Companies committing much larger amounts in long-term investments are also an indicator that companies see room for further growth in the near future.
The rest of the economy also showed some renewed strength. Take, for example, the business side of the general ledger. On the one hand, imports increased again after declining in the last six months of 2022. In early 2023, demand for several imports increased, particularly for automobiles, auto parts, petroleum and other durable goods such as appliances. The growing demand for imports again shows the strengthening of consumer spending. At the same time, exports grew 4.8% after falling 3.7% at the end of 2022. A wide range of exports.including cars, planes, food and other non-durable goods, posted double-digit gains in early 2023. More exports are likely due to increased global demand, providing an additional economic boost.
Furthermore, it is possible that part of the resilience of private sector activity is related to higher public spending. Public spending at all levels increased at a faster rate in the first three months of 2023 than in the last three months of 2022. public spending added 0.81 percentage points to economic growth in the first quarter, up from 0.65 percentage points in the second half of 2022. The additional government spending may be related to increased state and local government hiring that is still below its pre-pandemic level. In particular, governments must expand their capacity to address many of the looming challenges in education, public health, and transportation, as well as to implement additional spending on infrastructure. As governments increase their ability to deliver vital services and improve the foundation of a modern economy, they also provide revenue for private businesses, as well as an added buffer against the continued headwinds of higher interest rates and stagnation. politics in Washington, DC, and therefore some much-needed economic certainty.
The economy has proven resilient, so far. However, House Republicans seem intent on testing that resilience by creating unnecessary political uncertainty. This uncertainty could cloud the outlook for consumers and businesses and slow their spending as a result. In addition, the drive to aggressively reduce basic government services could derail many of the necessary investments in people, businesses, and communities. The recent strengthening of the economy could prove to be a short-lived mirage unless the Republicans quickly and unconditionally allow the federal government to pay all their bills.