U.S. Private Economy Is In A Contraction

by: Chris Ridder, CFA

Summary

US federal debt increased by $1.5 Trillion from a year ago.

US nominal GDP increased by less half a Trillion over about the same time period.

It appears the private US economy is in a contraction.

The US Federal Government Debt increased $1.57 Trillion during the last year. Yes, Trillion with a "T" from October 13, 2015 to October 13, 2016!

Data source

$.39 Trillion of debt came from Social Security (the US budget is toast once Social Security has more outflows than inflows); these bonds can't be traded in the markets.

$1.18 Trillion came from "Public" Debt, that is traded in the markets.

Nominal GDP was about $18.142 Trillion in Q3 2015. (Data Link)

Real GDP for Q3 2016 is expected to be 1.9% annualized, or .475% quarterly growth. (Data Link)

Inflation has been running about 1% according to CPI data (Data Link)

But let's be generous and add 1.5% annualized, or .375% quarterly, for the inflation rate in Q3 2016.

Then nominal GDP in Q3 2016 is forecast to be $18.607 Trillion. We get this figure by taking the Q2 2016 nominal GDP of $18.45 Trillion, and multiplying by 1 + .85% (3.4% annualized nominal growth for Q3 2016).

This is an increase of about $.465 Trillion from Q3 2015 to Q3 2016 (Or even lower if we use a 1% inflation figure).

Now, the problem.

The "formula" for GDP is Y = C + I + G + (X-M)

or

GDP = Consumption + Investment + Government Spending + (Exports - Imports)

Now, If Government spending increased by $1.57 Trillion and nominal GDP only increases by $.465 Trillion, then the private economy has been in a contraction by over a Trillion dollars! Or, $1.105 Trillion to be precise.

Even if one does not count Social Security debt, $1.18 Trillion minus $.465 Trillion is equal to $.715 Trillion.

It's not looking good for those firms that do not have contracts with the Government.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.