A huge influx of federal stimulus money to state and local governments more than offset a sharp drop in tax collections, helping to put the brakes on the nation's economic decline, new government data show.
The stimulus funds helped reverse six months of spending declines, pushing state and local government expenditures up 4.8% in the second quarter, reports the Bureau of Economic Analysis.
"The money has caused a very sharp change in the path of the economy, which had been in steep decline," said Chad Stone, chief economist at the liberal Center on Budget and Policy Priorities in Washington, D.C.
Federal cash is now the No. 1 revenue source for state and local governments, surpassing sales and property taxes, the government data show.
The flood of federal money lifted total revenues by 7.5%, overcoming an 8% drop in tax collections.
State and local governments are adding new workers and raising pay:
•Employment. State and local governments added 12,000 workers, a 0.1% increase, in the quarter, reports the Bureau of Labor Statistics. The private sector cut 1.3 million jobs, a 1.2% reduction, during this time. Federal employment was flat.
•Compensation. Pay and benefits rose at a 4% annual rate in the second quarter for state and local workers, BLS reports.
For private workers, compensation was up at a 0.8% annual rate, the lowest since the government started keeping track in 1980.
The jump in government spending - federal, state and local - was the key reason that the nation's gross domestic product declined just 1% in the quarter, a sharp improvement from a 6.4% first-quarter drop.
"The stimulus is working as intended," said Stone.
Economist Randall Pozdena said the temporary boost will hurt the economy in the long run because taxes will rise.
"The question is, are you spending money productively?" said Pozdena, managing director of ECONorthwest, a consulting firm in Portland, Ore.
Most of the extra spending in the second quarter went for buildings, highways and other capital projects, said Donald Boyd, a senior fellow at the Rockefeller Institute of Government in Albany, N.Y.
Other state and local spending was flat, after adjusting for inflation.
The stimulus funds let states avoid cuts, rather than increase spending, Boyd said.
By Dennis Cauchon, USA TODAY