We knew that economic performance looked bad all along, but just how bad got revealed today by the Department of Commerce. Despite massive government interventions, the economy performed almost exactly as badly in the first quarter of 2009 as it did in the last quarter of 2008. Wall Street took it in stride, at least early, reversing two days of losses (via Jim Geraghty):
The U.S. economy shrank at an annual pace of 6.1% in the first quarter — almost as much as it did in the fourth quarter of 2008, according to a government report Wednesday.
The drop was much worse than expected. According to economists surveyed by Briefing.com, expectations were for a drop of 4.7% in gross domestic product, the broadest measure of the nation’s economic activity.
The first quarter decline was the second biggest drop recorded in 26 years, behind only the fourth quarter reading. GDP fell 6.3% in the last three months of last year.
This puts a big hole in the Obama administration’s economic projections for the next year, and also for the long term. The OMB based its deficit projections on an assumption that the US economy would return to growth this year, which this GDP puts in severe doubt. With the economy barely moving towards the positive from the worst quarter in 26 years, these numbers look like sheer fantasy:
Even the CBO numbers, in dark red as opposed to OMB/WH pink, assumed some limited growth in 2009. Without that growth, the revenues will fall short of even CBO estimates, and we could be looking at a $2 trillion deficit this year and deepened deficits throughout the next several years.
Thus far, we have spent almost $3 trillion on bailouts and another $800 billion on stimulus packages. Clearly, these have not led to recovery. The bailouts were sold as ways to prevent a catastrophic collapse of the economic system, but thus far lending has not increased (for good reasons) and we’re still seeing bankruptcies ahead for GM, Chrysler, AIG, and others. Six banks failed their stress tests this week, as Stephen Spruiell notes, which may prompt even more government intervention.
Some will say that the stimulus package has not had enough time to work. It passed in mid-February, though, and six weeks of government spending didn’t move the needle. That highlights its greatest weakness: it doesn’t actually provide short-term stimulus. Republicans kept pointing out that most of the spending came after 2009, and half of it after 2010, when by the Obama budget projections the economy would already be in recovery.
After almost $4 trillion in spending and commitments, we’re still where we were in the 2008Q4.