The US economy contracted by a stunning annualized rate of 6.1 per cent in Q1.

The US contraction has now been in full flow for three quarters. In the third quarter of last year the annualized rate of contraction was just 0.5 per cent, so that wasn’t too bad. But the final quarter of last year saw a 6.3 per cent contraction, and now we know Q1 was almost as bad.

The contraction was worse than expected, but, curiously, it seems the real reason for this surprisingly bad performance was that US government spending was less than economists had allowed for. We keep hearing about the US fiscal stimulus, and how the government will spend its way out of recession; quite ironic, then, that this was the very sector that was responsible for such awful figures.

In a way, however, we can take some comfort from that. You may recall that film Brewster’s millions, in which the main character had to spend $30 million in 30 days in order to inherit $300 million. Brewster, played by Richard Pryor, found this surprisingly difficult, and in the process found out who his real friends were.

Well, the US Government has had a similar problem. It has earmarked all these billions, but it takes time to spend it.

Actually, take government spending out of the equation, and the performance in the quarter was slightly better than expected.

But it seems that private investment has just fallen off a cliff. Business investment was down by an appalling 37.9 per cent, while residential investment was actually slightly worse. Exports were down by 30 per cent.

© Investment & Business News 2013