Coronavirus-Hit State Budgets Create a Drag on U.S. Recovery

Spending cuts by state and local governments grappling with the coronavirus pandemic pose a headwind to the U.S. economic recovery as lawmakers consider how much federal aid to provide.

State and local governments reduced spending at a 5.6% annual rate in the second quarter as they laid off workers and pulled back on services to offset plunging tax revenues. More cuts are on the way.

Moody’s Analytics estimates that without additional federal aid, state and local budget shortfalls will total roughly $500 billion over the next two fiscal years. That...