This is why you keep hearing people say “the economy is doing much better than the headline numbers”. It is in fact doing fine. It is the subtraction of gov’t spending that is skewing numbers lower.  While that take the top line numbers down, it is in no way indicative of what is really happening out there. It is policy driving spending down in gov’t, not economic malaise. The private economy is growing at a healthy rate.

“Davidson” submits:

Government expense as part of Real GDP is most likely one of the most significant as well as the most missed of trends. Both Government Spending and Investment(see Chart 1) and Government Employment(see Chart 2) continue to shrink.

Economy screenshot_155 

July 2009 Real Government Spend&Inv represented 21.61% of Real GDP vs. today’s 17.98%. This is the lowest percentage Govt Spend&Inv has been since the data was first recorded in 1947!!

Dec 2009 Government Employment represented 16.29% of Household Survey employment vs. today’s 15.13%.

 These trends include local government shrinkage, reduction in public construction, military expenditure and other sectors. Since peak Government Spending occurred in July 2009, it has fallen from $3.113tril to $2.871tril or a drop of ~7.8%. Meanwhile the private sector has grown from $11.260tril to $13.094 or $1.83tril.

There are many who continue to believe that markets are only responding to the Fed keeping rates low. The data shows an entirely different picture. There is real growth in the economy. Enough real growth to offset the decline in Govt shrinkage and still provide a 2.34% growth in over all US Real GDP.

My earlier note indicated that we were perhaps at an inflection point where the decline in Government Spending had stopped pulling down the over all US Real GDP, but the latest reading shows that Govt Spending remains in decline. Once Government stops being a drag on the overall US Real GDP, investors historically have turned more positive and caused as significant lift to stocks.

In my opinion there is much to like about the current recovery. I expect a positive turn in investor psychology when Government stops shrinking and with this should come a better appetite for equity investment.

Via: valueplays