In order to understand the strength of our recovery, it’s important to examine the key economic indicators. Although no single indicator, considered alone, can paint the entire picture, monitoring the Business Investment, Consumer Spending, Residential Investment, Exports, Federal Government Spending & State/Local Government Spending numbers can help in better understanding the general economic climate.
Consumer spending is nearly 70 % of GDP. It is also important to understand that retail sales are just one subset of consumer spending. It includes expenses such as medical, energy & food. Discretionary & Non-Discretionary spending are the two components of consumer spending. Consumer spending rose 0.4% in August after staying flat in June, according to the Commerce Department.
Real residential fixed investment increased 27.2 percent, in contrast to a decrease of 12.3 percent in the first quarter. However, this index is misleading. The big boost in residential fixed investment is unsustainable over the long term. The expiration of the first time homebuyer tax credit will dramatically impact this number for the next quarter.
We have to understand that the Great Recession put a $ 2.3 Trillion hole in the aggregate demand since 2007. A fiscal stimulus measure (ARRA) & automatic stabilizers increased federal government outlays significantly since the recession started in December 2007. Real federal government consumption expenditures and gross investment increased 9.1 percent in the second quarter, compared with an increase of 1.8 percent in the first. National defense increased 7.3 percent, compared with an increase of 0.4 percent. This increase could be attributed to defense purchases to accommodate the need for changes in our combat mission overseas. Nondefense increased 12.9 percent, compared with an increase of 5.0 percent. Some of the Nondefense expenditure could be attributed to implicit automatic stabilizers through increased benefits to those impacted by the recession.
Real state and local government consumption expenditures and gross investment increased 1.2 percent, in contrast to a decrease of 3.8 percent in the first quarter. This is a positive trend for these cash strapped entities. Experts suggest that the tax base lost due to the Great Recession may not recover until late 2011. Therefore, spending from state/local government entities may continue to be a drag on the overall economy and may require further assistance from the Federal Government.
Real exports of goods and services increased 9.1 percent in the second quarter, compared with an increase of 11.4 percent in the first. Real imports of goods and services increased 32.4 percent, compared with an increase of 11.2 percent. The increased imports may dwarf the increase in exports. However, it is important to understand that going forward net exports can play an extremely important role in boosting GDP levels for the coming quarters ahead.
Federal Reserve Bank of New York's Empire State Manufacturing Survey reported that the manufacturing activity grew at a slightly better pace in August than in the previous month. The Empire State's business conditions index edged up to 7.10 from 5.08 in July. Conditions for the nation's manufacturers picked up its growth pace for the first time in four months, according to the Institute for Supply Management. The ISM index rose to 56.3% in August from 55.5% in July. This was much stronger than expected. Readings above 50 indicate expansion.
It seems that Exports & Business Investment could play a pivotal role in getting the nation out the recession. Public policy makers should closely evaluate pending proposals & legislation that benefit these components of GDP. Tax credits and push towards making domestically produced goods more competitive internationally could jumpstart our steady recovery.
Thanks to [Wikimedia](http://images.google.com/imgres?imgurl=http://upload.wikimedia.org/wikipedia/commons/2/28/Barack_Obama_announces_Economic_Recovery_Advisory_Board_2-6-09.jpg&imgrefurl=http://commons.wikimedia.org/wiki/File:Barack_Obama_announces_Economic_Recovery_Advisory_Board_2-6-09.jpg&usg=__RP0WllciLk8WCj1Sxh0FLQjMQZE=&h=351&w=624&sz=25&hl=en&start=0&sig2=HVOG9NThbJZBpY2AT_a8yQ&zoom=0&tbnid=9DJs9BQah7wKcM:&tbnh=77&tbnw=136&ei=v02NTJ3nG4X6lwfu2PBf&prev=/images%3Fq%3Deconomic%2Brecovery%26hl%3Den%26sa%3DG%26as_st%3Dy%26biw%3D1280%26bih%3D591%26tbs%3Disch:1,iur:f&itbs=1&iact=hc&vpx=591&vpy=177&dur=912&hovh=77&hovw=136&tx=72&ty=26&oei=v02NTJ3nG4X6lwfu2PBf&esq=1&page=1&ndsp=18&ved=1t:429,r:2,s:0) for the picture.