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Will the stimulative benefit of government spending continue to be a tailwind for the economy?

June 19, 2024 / 2 min read

While spending by the federal government was supportive of growth in 2023, fiscal policy is expected to be a headwind this year.

Fiscal policy expected to weigh on growth

The chart above illustrates the impact of changes in federal government spending on economic growth. Bars above the line illustrate a growing budget deficit as a percent of GDP (stimulative for economic growth), whereas bars below the line represent a lower deficit relative to GDP (a drag on economic growth).

As illustrated, government spending growth was robust in 2023, providing meaningful support to the economy. However, fiscal policy is expected to be a headwind to growth this year, as the deficit is projected to shrink relative to GDP.

Why does this matter? As discussed in our accompanying piece, consumer spending is likely to decelerate in the months ahead, as dwindling excess savings combined with rising household credit outstanding and slowing wage growth collectively tighten the screws on household budgets and weigh on discretionary spending. As consumption accounts for about two-thirds of economic activity in the United States, weaker household spending growth would be a significant headwind to the overall economy going forward. If recent projections illustrated above are correct, a reduction in the federal deficit in 2024 would create another near-term headwind to growth as well.

As we’ve discussed previously, a slowdown in growth isn’t synonymous with a recession, and forecasts for the U.S. economy in the coming year remain not only positive but well above those for most other major economies. A reversion to long-term trend growth should still be expected, and the catalysts for that to occur appear to be taking shape.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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