A key policy issue for 2021 will be how much disaster relief the Federal government will provide to state and local governments. If we look back at the Great Recession, most of the damage was done to the States after the recession. This is because state and local governments are required to run a balanced budget (or something close), and the state governments started cutting after the recession.
Here is a graph showing the contribution to percent change in GDP for residential investment and state and local governments since 2005.
The red bars are the contribution to the percent change in real GDP from state and local governments.
Although state and local governments were a drag on GDP in Q2 and Q3 in 2020, the worst may happen in 2021 as state and local governments work to balance their budgets.
This next graph shows total state and government payroll employment since January 2005. Note that graph doesn’t start at zero to better show the change in employment.
In 2020, there was a sharp decline in state and local government employment due to the pandemic (mostly in education employment).
Without Federal disaster relief, I expect state and local governments will have further layoffs in 2021.