Government-Spending Slump Nearing an End?

Bob Johnson: This week's chart reflects the annual growth rates of government spending--an important part of GDP. Those government-spending data show a highly volatile pattern that's primarily driven by up-and-down cycles in defense spending. There is also an element of where the federal government spends more money in the middle of a recession to offset consumption weakness to balance the economy. State and local government, which comprises about 60% of the total, is far less volatile as they can't really borrow money to finance additional expenditures. So, those numbers are far less volatile.

Looking at the whole picture, besides the volatility, the growth rate in local government is about 1.9% during the last 50 years or so. That's far less than the 3.1% growth that we've seen in GDP. If you take a look, you can also see on the graph that, as a percentage of GDP, government has gone from more than 30% of GDP in the 1960s to about 15% right now. So, clearly, government has grown more slowly and has almost been a drag on the U.S. economy.

Looking at the data now, we think that the government spending has been negative for the last four years or five years. In 2015, when the final data get printed in a few weeks, we think we'll see that government spending went up for the first time since the recession, which is great news for the economy.

We expect that government spending will continue to be a bigger contributor to GDP growth in the years ahead as state and local governments collect more tax revenues and also as the federal government moves out of this period of sequestration that was limiting growth and defense spending reaches a relative bottom in its cycle.