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No strong evidence for a rosy US economic outlook

11 Feb 2013 by Jim Fickett.

Some commentators are optimistic about GDP growth improving, but so far all the evidence I've seen presented is quite weak. For example, Bill McBride at Calculated Risk, in support of his rosy outlook, wrote today,

The good news is the cutbacks at the state and local level are probably mostly over.

The next missing tailwind has been a focus of this blog: Residential investment (RI). RI has finally turned the corner and has started to contribute to the economy.

On residential investment, I already pointed out that the trend in total construction spending has not changed in about two years. How can one get excited about acceleration in residential investment, while ignoring that it is canceled out by weakness in commercial and public spending?

As for state and local spending, it is true, as McBride has pointed out many times, that the layoffs are slowing. One can see this in the following state and local government spending graph, with consumption expenditures declining at a slower rate, or perhaps even leveling out:

(Data are from NIPA, through 2012Q3, the latest available.)

But note also that the increase in transfers continues, largely due to Medicaid, so that budgets remain under stress. Borrowing remains at high levels, despite the decrease in construction projects. So it is by no means clear that state spending is done declining.

One sees this also on the income side. Total tax receipts are in an uptrend, but just barely, closer to flat than to the historical growth rate.

All told, while it is clear that the cliff in state and local spending is past, and has been for a long time, it is certainly far from clear that state and local spending is going to contribute to growth.

It is certainly possible that US economic growth will improve; there are indeed some positive signs. But they are balanced by a number of negative signs and I think, on the whole, that the outlook remains one of very fragile, below-average growth.

(For data sources, background, and past commentary, see the Reference page NIPA state and local budgets.)

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