Hutchins’ Fiscal Impact Measure shows sluggish government spending contributed to weak fourth quarter GDP growth

The Fiscal Impact Measure, which tracks the contribution of local, state and federal fiscal policy to economic growth, came in slightly above zero in the fourth quarter of 2015, according to the latest update released Friday, January 29th, 2016 by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

Local, state and federal fiscal policy added 0.06 percentage points to the pace of economic growth in the fourth quarter, according to the FIM. The overall economy grew an annual, inflation-adjusted rate of 0.7% in the fourth quarter, according to the latest Bureau of Economic Analysis estimate. 

The fourth-quarter reading on the FIM follows positive readings of 0.22% in the third quarter and 0.47% in the second quarter; the FIM was negative for the four preceding years amid federal tax increases and across-the-board spending cuts and state and local belt-tightening.

“Today’s Fiscal Impact Measure reading shows that the government sector contributed to the weakness in fourth-quarter GDP,” said Hutchins Center Policy Director Louise Sheiner. “State and local spending, in particular, declined in the fourth quarter, following two quarters of solid growth, suggesting that state and local governments remain cautious about their spending decisions. Federal government expenditures rose modestly in the fourth quarter, boosted by strength in defense spending, which tends to be noisy from quarter to quarter. Changes in taxes and transfers were a net negative for GDP growth in the fourth quarter.”

The Hutchins Center’s Fiscal Impact Measure, updated quarterly, is a gauge of the contribution of federal, state, and local fiscal policy to near-term changes in the gross domestic product (the tally of all the goods and services produced in the economy.) It includes both the direct effects of government purchases as well as the more indirect effects of government taxes and government transfers, such as Medicare and Social Security. When FIM is positive, the government is contributing to real GDP growth; when it is negative, it is subtracting from it.

To see the FIM trend over the past decade as well as other indicators of local, state and federal tax and spending policy, see the Hutchins Center’s  Fiscal Barometer.

Details on the construction of the measure are also available