Signs Point To A Comeback In State And Local Spending

Declines in state and local spending have been a huge drag on the economy. Deutsche Bank Chief US Economist Joe LaVorgna points to some stats that show out exactly how bad it has been. From his daily economic note:

Though most analysts have focused on the upcoming “fiscal cliff” at the federal level, state and local (S&L) government spending is actually over 40% greater than federal spending, accounting for over 10% of real GDP (compared to 7.5% for the former). For the labour market, S&L employment is vastly more important, accounting for 14% of nonfarm payrolls compared 2.1% at the federal level. Up to this point in the recovery, S&L spending has on average subtracted approximately 0.4 percentage points from real GDP growth per quarter.

There are some positive signs for the future. The ability of these governments to spend is determined by revenue. State revenue has been rising for 9 consecutive quarters.

Growth has been held back by local revenue, 80 per cent of which is derived from housing prices. As housing recovers, so will their revenues, and municipal cuts will finally slow down, boosting the economy. 

However, there’s something of a lag, so meaningful improvement may still be some time away:

State local revs

Photo: Deutsche Bank

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