Government to the Rescue!

An Overlooked Source for Economic Growth

While there are growing concerns regarding soft manufacturing data and slowing emerging market consumption, many are overlooking an offsetting trend offering new support for growing the US economy. What is this new source of growth? Government spending!

As odd as it may sound, it’s government to the rescue. After more or less four years of trimming budgets, the U.S. government is back to positive spending growth. Chart 1 shows that aggregate government spending across the U.S. (this includes federal, state, and local) was shrinking year over year from the third quarter of 2010 to the third quarter of 2014.

Chart 1

But, hasn’t big government always had spending growth? Well, at least not for the last few years. The spending declines came from the unraveling of post-crises stimulus measures and were extended when Congress enacted sequestration in late 2012.

Considering that government spending constitutes approximately 18% of total U.S. GDP, this means government spending was hurting aggregate growth. Meanwhile, fixed investments and private consumption carried the growth burden. These two components led the non-governmental side of the economy to an average growth rate of about 2.9%, far better than what most people believe.

As the economy matures further into this present expansion, government spending is projected to increase at a more rapid rate. To an economy pleading for growth, this means big government spending increases are helping growth rather than hindering it.