US Government Spending as a Percent of GDP

Source: FRED

Source: FRED

US federal government spending remains elevated as a share of GDP.  From 1970 through 2007, federal spending averaged 21.0% of GDP.  This soared with the Great Recession, averaging 25.0% of GDP from Q4 2009 to Q4 2011, and 24.0% of GDP from 2008-2012.    It currently stands at 22.5% of GDP, and thus we may conclude--assuming no crowding out--that the relative decline in spending since 2011 has reduced GDP by 2.5%--an entire year's growth--compared to what we might have expected. 

This effect is likely to continue, assuming federal government spending reverts to its longer term level of 21.0% of GDP, which in turn implies another 1.5% of GDP drag in the next 2-3 years.  Subsequently, we might expect government spending to increase with--and contribute more meaningfully to--GDP.

Therefore, we need not entirely despair of seeing higher GDP growth rates again, but we are still sorting out the aftermath of the Great Recession, and for a least a few more years, government spending is likely to remain a relative drag on growth.

I would add that the last time the US saw really good GDP growth was under President Clinton, when government spending was falling as a percent of GDP and fell as low as 18.6% of GDP.  On the other hand, government spending has averaged 23.4% under President Obama.  This represents the highest average since WWII, and at the same time, coincides with the weakest economic recovery since at least the Great Depression.