Continued Growth in Q1

The economy continued to grow in the first quarter at what we estimate is a 2.6% annual rate. That’s a slowdown from the 3.1% rate in 2023, but still good compared to the past couple of decades when the average growth rate has been 2.0%.

However, we think a chunk of recent growth is artificial, and temporary, the by-product of too much government. Directly, this includes “real” (inflation-adjusted) government purchases that grew 4.6% in 2023 and we estimate grew at a 2.3% annual rate in the first quarter.

It also includes the indirect effects of the expansion in the budget deficit in FY 2023. The official deficit didn’t expand much, but that’s because President Biden announced a plan to forgive student loans in 2022 and then the Supreme Court struck it down in 2023. Neither of these affected the government’s cash flow but they did change official government accounting. Taking them out means the deficit expanded to 7.5% of GDP in FY 2023 from 3.9% in FY 2022.

In addition, and as we explained recently (MMO, April 8), if monetary policy were really tight, inflation would be persistently declining. But CPI prices were up 3.0% in the year ending in June 2023 and are now up 3.5% in the past year. This suggests residual effects of past monetary looseness are still boosting the economy.

We estimate that Real GDP expanded at a 2.6% annual rate in the first quarter, mostly accounted for by an increase in consumer spending.