Monday, September 02, 2013

GDP drag from State and Local Governments

by Bill McBride on 9/02/2013 11:30:00 AM

One of the reasons I expect GDP to pick up over the next few years is that state and local government spending will probably stop being a drag on GDP, and might even add a little to GDP going forward.

However the 2nd estimate of GDP showed state and local government spending was still a drag on GDP in Q2 (the advance estimate indicated a small positive contribution).

This graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

State and Local Government Residential Investment GDP
Click on graph for larger image.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 11 quarters (through Q2 2013).

However state and local government spending has made a negative contribution for 13 of the last 14 quarters.

The drag has diminished but is still ongoing.  Based on recent news reports, I expect state and local governments to make small positive contributions to GDP going forward.

Note: Currently state and local government as a percent of GDP is back to 1970 levels!

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