This is the “rainy day” that states were saving up for

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Here’s a bit of interesting context on the US Recession That Wasn’t: State and local governments have helped drive recent hiring and economic growth.

In fact, the outlook for muni-government spending has prompted Goldman Sachs to raise its GDP growth by 0.3 percentage points for the first and second quarters of this year, and 0.1pp for all of 2024.

US state and local government spending/hiring might sound like a niche topic to global readers (who don’t get those nice tax breaks on muni bonds) but it makes up about 10 per cent of US GDP, according to the bank.

While the total amount of municipal dollars spent will probably drop this year, real spending will remain steady because of slowing inflation, GS expects:

State and local government spending also matters more today than it did a couple of years ago, because hiring is slowing in other more “cyclical” industries.

Governments have been among the biggest creators of jobs in the past few jobs reports, as BLS data show. And about half of that has been hiring by state and local educational systems, the bank points out, as school enrolment picks up for the first time since Covid-19 shutdowns:

Before our ZeroHedge-ier readers argue this shows the Fix Is In, it should be acknowledged that it is indeed an election year in the US.

GS points out that half of muni-spending growth in 2023 went to investment, thanks to “a combination of slightly faster-than-expected spending from the bipartisan infrastructure law and a rush to spend pandemic-related federal fiscal support before expiry.” In other words, if the Fix Is Really In, it’s in for the incumbents, no matter the party.

From GS:

We had previously expected spending from the Infrastructure Investment and Jobs Act (IIJA) to add between $25bn (under our baseline scenario) and $45bn (under our high spendout rate scenario). States are also likely spending remaining pandemic-related fiscal support, as they have until 2024 to allocate and 2026 to spend the $350bn passed by Congress in 2021, of which only 42% had been spent through 2023Q1, according to the latest official data.

And we haven’t even addressed a main reason state governments spent more than expected in 2023: the vibecession. States had budgeted for tax revenues to decline much more than they did:

Of course, tax revenues did drop, and are expected to keep declining. That can’t continue indefinitely without weighing on the US’s economic growth. From the bank:

When can we expect sagging S&L tax revenues to moderate consumption and gross investment growth? Using national level S&L data back to 1955, we find that changes in revenues over the prior year account for 40% of the variance in S&L consumption and gross investment. The peak impact comes four quarters after a slowdown, with spending falling by 0.25% for every 1% decline in revenues, all else equal.

But municipal governments built up massive “Rainy Day” funds after Covid-19 hit, and still have a “very substantial fiscal cushion,” says GS.

As it turns out, their past years of somewhat puzzling fiscal conservatism could’ve helped keep the US’s vibecession from turning into a full-blown recession.