Economy and government purchasing predictions for the second half of 2012

Editor’s note: The following is the sixth of a six-part series on government budgets and government spending that comprise the Keating Report mid-year 2012 forecast. The topics we are covering include: federal fiscal trends, state finances, local government fiscal realities, public works and transportation construction, public-private partnerships and economy and government purchases.

The economy continues to slowly lurch ahead, and that is affecting government budgets. U.S. hiring trends remained soft in May, as employers added fewer workers than expected. In May, in fact, the U.S. added the fewest jobs in a year, as payrolls expanded by only 69,000, and the unemployment rate rose to 8.2 percent.

Lukewarm economic news caused New York-based Standard & Poor’s (S&P) Ratings Services to predict that state and local governments would see gradual but uneven revenue improvement in the months ahead. S&P’s baseline forecast noted that the outlook for states is stronger than for local governments. “This is because [states are] more dependent upon income taxes while [local governments are] more dependent on property taxes, which have not yet recovered from the drops of the past four years,” the report explains.

Uneven revenue growth in governments translates into minimal growth in government purchases. In 2012, government purchases of goods and services will reach $3.03 trillion, the same number as 2011, according to Waltham, Mass.-based economic forecaster IHS Global Insight. For 2012, federal government purchases of goods and services will total $1.22 trillion, while state and local government purchases will reach $1.81 trillion. In 2013, government purchases will rise to just 3.04 trillion, and in 2014, purchases will grow to $3.07 trillion, predicts IHS in its May 2012 forecast.

In its June 6, 2012 analysis, “U.S. Employment Growth Disappoints in May,” IHS Global Insight said: The United States’ May payroll employment growth came in at a very disappointing 69,000, the bad news exacerbated by downward revisions to prior months.” The analysis noted that the unemployment rate has risen 0.1 percentage point to 8.2 percent, while job creation has slowed markedly. IHS economists said the surge in employment growth that the U.S. experienced at the beginning of 2012 was not continuing.

The analysis reported that the government sector shed 13,000 jobs in May. Federal employment dropped 5,000. State and local government employment fell by 8,000, down 5,000 in state government and down 3,000 in local government for May. “State and local job losses have slowed — but they have not stopped yet,” said the IHS May analysis.

What about the tail end of 2012?

Will Congress send the economy over a fiscal cliff and into a deeper recession? If Congress does not deal with a host of fiscal measures by Dec. 31, some $560 billion in drastic budget cuts and tax hikes (equal to about 5 percent of the U.S. gross domestic product) will result. The budget actions include cancelling all of the Bush-era tax cuts, cutting spending automatically in defense and non-defense programs, removing the alternative minimum tax fix, cancelling the payroll tax cut and ending the unemployment benefits extension. According to the CBO, if the tax hikes and spending cuts take place, the nation’s economic growth will be hobbled in the short term.

It is likely that Congress will put off making the key fiscal decisions until after the November election. That leaves just six weeks, at most, for addressing, solving and/or delaying the full consequences of the fiscal cliff. The limited time frame ensures that Congress is likely to pass a stopgap extension of current policy for several months. Experts predict a temporary extension in December, followed by the enactment of a heatedly debated one-year budget compromise next February retroactive to Jan. 1, 2013.

View additional installments of our second-half 2012 forecast as well as the January 2012 forecast.

Related Stories

• What states spend the least, per-capita? (Part 1)
• What states spend the least, per-capita? (Part 2)
• Revenue grew in 2011 for half of government contractors
• 2012 Keating Report on government budgets and spending
• Keating Report on government budgets and spending, 2nd half 2011
• 2011 Keating Report on government budgets and spending