Stimulus has yet to really boost GDP

The nation's economy improves, but the $787 billion stimulus plan likely won't have an impact on gross domestic product until third quarter.

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By Tami Luhby, senior writer

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NEW YORK ( -- The nation's economy is starting to rebound, but the Obama administration's massive stimulus package had little to do with it.

The gross domestic product contracted at an annual rate of 1%, a significantly slower decline than the past two quarters. Economists had expected a drop of 1.5%.

While government spending at all levels increased in the second quarter, only a small amount of the $787 billion stimulus package had trickled out by June 30.

As of July 3, only $60.4 billion of recovery funds had been distributed, the largest chunk of which went to help states cope with rising Medicaid costs. Much of the $43 billion in stimulus tax relief -- which includes the Making Work Pay tax credit for individuals -- also kicked in during the quarter.

"I don't think the effect of stimulus has been very large," said Edward Lazear, an economics professor at Stanford's Graduate School of Business who advised former President George W. Bush. "Very little has gone out."

Non-defense federal government spending provided a 0.15 percentage point boost to GDP, while state and local government spending contributed 0.30 percentage points, according to the Commerce Department. Federal spending jumped nearly 11%, though much of it was in the defense arena, while state and local government outlays increased 2.4%.

To be sure, stimulus spending had some effect. Some of the early components of stimulus to be distributed have allowed people to spend more, said Dean Baker, co-director of the Center for Economic and Policy Research. Those who received the $25 increase in unemployment benefits have likely already put those funds into the economy.

And states did put the money they received to use, which contributed to the fastest growth in state and local government spending since the middle of 2007, according to Josh Bivens, an economist with the Economic Policy Institute.

Some economists say that the GDP numbers would have been worse without the stimulus funds. Bivens estimated the recovery act money may have contributed as much as 3 percentage points of annualized growth to the quarter.

But others expect the figures to be revised downward in the future. They point to an 8.9% contraction in business spending and a 7% decline in hours worked, which doesn't mesh with a mere 1% decline in GDP.

The true test of the stimulus package will come in the fall, when the government reports economic activity for the third quarter. The administration is working to get the money out the door quicker, as complaints mount that stimulus is not having its promised effect.

"The third quarter will be a critical time period for assessing the stimulus package," said Mark Thoma, an economics professor at the University of Oregon.

Friday's GDP report comes as some experts are calling for a second stimulus package to further juice the economy. They say the first was not enough to promote a recovery.

"It is preventing a collapse," said L. Randall Wray, senior scholar at the Levy Economics Institute of Bard College. "I wouldn't say it is big enough to get us growing."

Others, however, say that more government funding will not address the key issues -- such as the housing and financial markets turmoil -- holding back the economy.

"You will feel better, but it won't really get at the heart of the problems driving the crisis," said Philip Levy, a scholar at the American Enterprise Institute who worked in the Bush administration.

How has President Obama's $787 billion stimulus program affected you or your community? Are you seeing a benefit from the Making Work Pay tax cuts or the additional $25 in unemployment benefits? Are you seeing construction jobs or other stimulus-funded work in your neighborhood? Do you still have a job because of stimulus funds? We want to hear your experiences. E-mail your story to or send in an iReport and you could be part of an upcoming article. For the Comment Policy, click here. To top of page

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