So why does GDPNow show government spending as a negative contribution to GDP?
That question came my way on Twitter.
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
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.
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, most of which does not impact GDP because it was a transfer payment.
Government spending directly contributes to GDP. But transfer payments do not constitute government spending.
Transfer payments include Social Security, Medicare, unemployment insurance, welfare programs, and subsidies. These are not included in GDP because they are not payments for goods or services, but rather means of allocating money to achieve social ends.
GDPNow Forecast is Negative 51.2 Percent
The May 29 GDPNow Forecast is Negative 51.2 Percent
The New York Fed Nowcast estimate took a dive to -35.5% from -30.5%.
Transfer payments do count towards income, thus accounting for the income surge.
GDP forecasts plunged because Income Surges as Spending Drops Most on Record
Curiously, if the government paid people to howl at the moon, that would be a service and would count towards GDP.
Government spending, no matter how ludicrous counts towards GDP.
This is an example of how ridiculous the GDP measure is.