Cross-border stimulus

US economy: US multinationals are propping up the nation’s economic growth. While annualized first quarter GDP growth was a sluggish 1.8 per cent, much of it inventory buildup, the private sector expanded more strongly, as did returns from overseas investments. With the government now reining in outlays, America's biggest companies are providing the economic stimulus.

The headline GDP growth figure would have been 1.1 percentage points higher but for a decline in government spending. And gross private sector output grew at an annual pace of 3.6 per cent in the quarter, up from a 2.6 per cent growth rate for 2010 as a whole, suggesting an acceleration in productive output as the government's post-crisis efforts at stimulus are withdrawn.

Meanwhile, gross national product grew at a 3.1 per cent rate in the quarter. GNP is based on ownership rather than geography and so includes income from US investments abroad, net of payments to foreigners. Net receipts jumped 26 per cent from $160 billion to $202 billion at an annual rate. Even in a $15 trillion economy, that's a sizable contribution to growth from the country's multinationals, and demonstrates that their profitability and growth can still overcome some of the drag from America’s huge budget and payments deficits.

That’s all despite the fact that the first quarter GDP report was somewhat disquieting when viewed at the consumer level. Final sales to domestic purchasers rose at only a 0.7 per cent annual rate, while inventories increased by $52 billion, a potential cause of future weakness if the buildup reverses. The US savings rate also declined further to 5.1 per cent, suggesting consumers are still not rebuilding their reserves.

Overall, though, the latest data hint at a healthy shift away from government spending and toward the private sector and the global economy. Logical policy responses include increasing interest rates, thereby providing an incentive for the rebuilding of America's capital base, and encouraging free trade to the benefit of US multinationals. Another lesson can be found in the private sector's ability to keep growth going even as government spending shrinks. With luck, policymakers across the spectrum will see the benefit of helping rather than hindering this rebalancing.