Economic Development

Latest GDP Data Shows Private Sector Growth

Recent data released by the Bureau of Economic Analysis shows that America is slowly recovering from the effects of COVID-19 and government-mandated lockdowns. Initial data shows GDP increased at an annual rate of 6.9% in Q4 2021, up from 2.3% in Q3. Real GDP increased 5.7% in calendar-year 2021, contrasting with a 3.4% decrease in CY 2020. The BEA also plans to release updated estimates this month as more data comes in and is further revised.

The Q4 increase in real GDP primarily reflected increases in “private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment that were partly offset by decreases in both federal and state and local government spending” since Q3 2021. The decrease in federal spending reflected a decrease in “defense spending on intermediate goods and services.” The decrease in state and local government spending reflected decreases in state and local employee compensation, notably education, and decreases in the construction of government buildings.

The real GDP increase in CY 2021, on the other hand, “reflected increases in all major subcomponents” but was driven primarily by investment and consumption.

Here’s where the BEA makes a mistake. The economy grows despite government spending, not because of government spending. The slight decreases in government spending from Q3 to Q4 2021 enabled increases in investment, the primary driver of economic growth, and consumption. 

When government spending increases, as it has for CY 2021, it does so at the expense of private investment and consumption. Every dollar the government spends it collects through taxes and, when it takes on debt, it diverts private capital out of the market. That means lower consumption and lower investment. When these variables decrease at the expense of increasing government spending, long-run economic health is jeopardized.

If government spending did not increase with investment, consumption, and exports, those components of GDP could have had even stronger growth than the data currently reflects.

The BEA also noted, “In the fourth quarter, COVID-19 cases resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country…The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter because the impacts are generally embedded in source data and cannot be separately identified.”

While state-specific data for Q4 and CY 2021 aren’t available yet, initial data shows the states that have reopened and the states that ended the bonus unemployment payments early are helping to drive the recovery.

In Depth: Economic Development

The United States is among the most developed economies in the world. This has led to a standard of living that is simply unmatched throughout the world or throughout history. Even in such a developed and comparatively wealthy nation, policymakers still must allocate resources appropriately to encourage further economic development…

+ Economic Development In Depth