If anything is evident from the United States first quarter GDP numbers it is that confidence has returned to their economy. Consumer spending, which contributes to approximately two thirds of their gross domestic product, surged to its highest level in the past two years. This is despite not only consumers facing a smaller paycheck as median incomes shrank in the quarter, but also as Americans saw their savings deteriorate as this increase in consumption was fed by a rising debt burden.
The question from here though becomes what is the outlook for the rest of this year and going forward for the US. Really, it can go one of two ways. One being that increased confidence provides the private sector with the motivation it needs to take over from what has been an overbearing public spending spree. Another is that growth subdues once again as individuals face the constraint of their smaller budgets. As consumption was by far the greatest contributor to growth in the quarter, the hindrance came from government spending as the greatest cuts imposed since the Korean War acted like an anchor on the economy.
The untargeted government spending cuts prompted by budget sequestration has hopefully now been realized to be of no benefit. And I stress this is for the reason of the mere fact that these cuts were untargeted and only ever presented as a scare tactic and not actual debated and well thought out policy. What the most recent events, however, have revealed is that the politics of this whole charade became even clearer. For example, the mandatory furloughs for air traffic controllers were a major spending cut in the department of the FAA, yet there existed greater inefficiencies. And due to their impact on the average taxpayer, congress quickly acted to reverse this decision in attempt to preserve what little popularity they might still have.
Back at the end of March when sequestration was implemented analysts discussed the negative connotations of these draconian spending cuts implemented in an inefficient manner, but seeing them now materialize gives an indication of what more is to come unless restructured. When an economy enters a recession we do see an increase in government spending as it attempts support the shortfalls from the free market system. I am not presenting this to act as a proponent of Keynesian economics, but merely looking back at history as evidence. As the growth engine revs up once again, there in theory should be a handoff from public to private. Of course, the ongoing problem is that this handoff is all but seamless.
Allowing a few weeks to let these lower precious metal prices settle in, it’s interesting to understand the mindset of a gold or silver investor. This is because they buy gold at these levels the same as they did at 1,600 or 1,700 per ounce. The story has not changed. We live in a time period where populism and idealism trumps realism and that is what guides our political system. These shortfalls of a central government are compensated for by central bankers whom have been forced to rewrite economic textbooks in order to avoid sending our livelihoods into ruins and only hope for no catastrophic consequences. With that in my mind, let’s hope people can stay this optimistic about the economy to keep spending and growth advancing.