How Do Stimulus Checks Impact GDP Estimates?

Congress approved a $2 trillion stimulus package with checks for $1200 sent. Government spending adds to GDP.

So why does GDPNow show government spending as a negative contribution to GDP?

That question came my way on Twitter.

Does anyone know why the Atlanta Fed has US Govt spending detracting from Q2 GDP? @MishGEA @AtlantaFed ? pic.twitter.com/Ii44kZjCs4
— Rob Hawcroft (@robhawcroft) May 29, 2020

I answered "I suspect the model thinks a downturn in state spending will offset government spending"

I posed the question to Pat Higgins, creator of GDPNow.

Reply from Pat Higgins

Hi Mish

The model has real federal government expenditures increasing 1.7 percent and real state+local government expenditures decreasing 7.8 percent this quarter [at annualized rates]. You can see this in rows 14-15 of the tab TrackingHistory.

So you are largely correct. Within state+local spending, much of the decline is concentrated in “compensation of general government employees” [NIPA tables 3.10.5 and 3.10.6] which accounted for 61% of state+local government expenditures last quarter.

The model uses state+local payroll employment, which declined by nearly 1 million jobs last month, to forecast that subcomponent of State and Local (S+L) expenditures.

The model is only going to account for features of the CARES Act of 2020 to the extent it shows up in the GDP source data when it is released. Also real disposable personal income is used to estimate the model’s factor, but not to directly forecast yet-to-be released consumer spending data.

Best regards,

Pat

One can download the spreadsheets to follow what he is saying.

But the short answer is the model believes states were clobbered more than enough to offset Congress' $2 trillion stimulus package.

GDPNow Forecast is Negative 51.2 Percent

GDPNow and Nowcast 2020-05-29