Oh là là, quelle surprise for the French economy

French economic growth unexpectedly picked up to 0.3 percent in the final three months of last year, welcome news and a rare positive shock for some particularly gloomy forecasters who were looking for shrinkage or no growth at all.

But the unexpected bounce may be partly for the wrong reason: government spending.

The Markit PMIs, which are generally accepted as a good gauge of the private sector economy, suggested economic deterioration throughout the quarter, leading Markit’s chief economist Chris Williamson to predict a 0.1 percent contraction.

One forecaster in the Reuters poll of 32 said French gross domestic product would shrink by 0.2 percent, and there was one going for -0.1 percent and another for no growth at all.

“The PMI continues to signal a weaker performance than the official data,” wrote Williamson in a note. “This divergence in part, but not fully, reflects ongoing strong government spending in France, which is excluded from the PMI coverage.”

Blame small government for U.S. GDP downer

Weak U.S. economic growth in the first quarter was driven in part by a pullback in business investment — but a sharp decline in government spending also played a role. Gross domestic product grew 2.2 percent, well short of the Reuters consensus forecast of 2.5 percent. Business spending fell 2.1 percent while government expenditures saw a 3 percent drop linked to lower defense spending. Consumer spending proved a bright spot in the report, climbing 2.9 percent. Still, there is concern that this too could fade because an unusually warm winter may have brought some spending forward.

Jay Feldman at Credit Suisse breaks down the numbers:

The big downside surprise from our vantage point was in federal government spending, which contracted 5.6% in the quarter (we expected an increase given the firmer readings in monthly Treasury data). Most of the shortfall was concentrated in defense (-8.1%). Combined with the ongoing contraction in state and local government output (-1.2%), the government sector overall shaved 0.6 percentage point from top line GDP.

Yet this pales in comparison to what might happen if Congress fails to break a budget logjam by the end of this year. If left unaddressed, the resulting spending cuts and expiring tax breaks — the dreaded fiscal cliff — could easily tip the world’s largest economy back into recession.

Stimulus now can ease debt burden later: DeLong and Summers

Spend more now, save more later. It may sound somewhat counterintuitive, but it’s the best prescription for getting out of deep economic ruts, according to a new paper from Bradford DeLong and Lawrence Summers, former economic policymakers now in academia.

In particular, the economists focus on the notion of hysteresis, which is a state where a prolonged period of economic retrenchment and high long-term unemployment creates new types of structural barriers to reintegrating the jobless back into the labor market. It thereby does lasting damage to the economy’s potential rate of growth.

Against this backdrop, DeLong and Summers argue a highly stimulative fiscal policy can actually reduce the long-term debt burden. They argue vigorously against policies of austerity, saying they are self-defeating and ultimately may actually worsen a country’s debt profile.

Thanks Uncle Sam!

It’s good to have a rich uncle. Until he runs out of money.

Thanks to a big jump in government spending, the U.S. economy didn’t shrink quite as dramatically as expected. While investors breathed a sigh of relief over the relatively modest 0.3 percent decline in third-quarter GDP, a look behind the numbers shows the main pillar of the economy crumbling.

Real disposable personal income — the extra money in consumers’ pockets that keeps cash registers ringing — fell 8.7 percent, the biggest decline since quarterly records started in 1947.

Considering that consumer spending accounts for about two-thirds of U.S. economic activity, that’s a scary number. So why didn’t GDP fall off a cliff? Government spending was up 5.8 percent, the biggest jump since the second quarter of 2003, which was right after the start of the Iraq War.