Why has the US recovery since the financial crisis been so horrendously slow?
Here’s one really simple answer: An extraordinary period of austerity.
Check out this chart from Deutsche Bank Chief Economist Joe LaVorgna:
For four years since the end of the recession, government spending has been a net drag on GDP (with the exception of one quarter last year), whereas in most recessions, government spending is net positive for GDP throughout. Most of this has been centered on state and local bloodletting, though this year the Federal Government joined the austerity parade with the sequester.
There’s good news: The title of Deutsche Bank’s report is: “The public sector is poised to join the party.”
This drag is about to end:
The government sector has been a significant drag on economic activity over the past several years. Federal as well as state and local spending have fallen sharply. However, this downtrend may reverse in the coming quarters because of improving government finances. This would allow for faster spending and consequently stronger economic activity as measured by GDP.