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.
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