by Calculated Risk on 9/01/2014 11:00:00 AM

Two and half years ago I argued that "most of the drag from state and local governments would be over by mid-year 2012. Just eliminating the drag from state and local governments would help GDP and employment growth". This has been an important change.

Here is a graph showing the contribution to percent change in GDP for residential investment and state and local governments since 2005.

Click on graph for larger image.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. RI (blue) added to GDP growth for a few years, before subtracting in Q4 2013 and Q1 2014. RI bounced back in Q2, and since RI is still very low, I expect RI to make a positive contribution to GDP for some time.

State and local governments had been a drag on GDP for several years (red). Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline was relentless and unprecedented.

Now the contribution from state and local governments has been positive for 5 of the last 6 quarters.

The second graph shows total state and government payroll employment since January 2007. State and local governments lost jobs for four straight years, but the decline slowed sharply in 2012. (Note: Scale doesn't start at zero to better show the change.)

In July 2014, state and local governments added 11,000 jobs.  State and local government employment is now up 151,000 from the bottom, but still 593,000 below the peak.

It is pretty clear that state and local employment is now increasing.  Note: Federal government layoffs have slowed (unchanged in July), but Federal employment is still down 22,000 for the year.

I expect state and local governments to make a positive contribution going forward.