One of the reasons for the slow US recovery has been weaker than usual government spending. The weakness started with fiscal consolidation at the state and local level, driven by sharp declines in tax revenues. The negative impact on the economy is now more pronounced at the federal level. In previous recoveries government expenditures provided cushion to the economy, while in this recovery the net impact of government activity creates a drag.
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| Source: DB |
The most direct impact has been on the US labor markets. The chart below shows the decline in government payrolls over time (not seasonally adjusted).
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| Source: US Department of Labor |
The decline in government payrolls has been slowing – mostly due to the stabilization in state and local employment. Federal jobs are another story.
Given the fiscal drag resulting from an already weak (relatively) federal spending, the US economy is vulnerable to the outcome of the upcoming debt ceiling/budget fight.
BNY Mellon: – The upcoming showdown between Republicans and Democrats of Capitol Hill over both the 2014 federal budget and the national debt ceiling is shaping up to be a battle royal in Washington…”
In fact the “showdown” has already started. Some Republicans have threatened to shut down the federal government (by withholding funding) if the administration does not compromise on the Affordable Care Act. Yesterday the Obama administration fired back (see video below). While nobody thinks the situation will turn as ugly as it did in August of 2011, a major budget disruption (beyond the sequester) could create a serious setback for the US economy. And in this tepid recovery there is little else that could compensate for this potential increase in “fiscal drag”. Having developed a “tolerance” to repeated budget fights however, the public unfortunately seems to have lost interest.
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| Google Trends for phrase “federal budget” (US-based searches only) |
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