The economy grew at a 3.2% clip in the first quarter of the year. This is the third straight quarter of economic growth, and in contrast to the previous two quarters, this one accompanied a slight rise in consumer spending, which means that replacing inventory alone is not accounting for the increase.

However, this GDP increase is significantly lower than last quarter’s 5.6% increase. It means that we’re settling in with modest growth, and there isn’t much on the horizon that will alter that trajectory. In fact, the weakened euro as a cause of the sovereign debt crisis in Greece and elsewhere could mean a stronger dollar and a bigger trade imbalance, as it will be more expensive to purchase American goods.

Dean Baker of the Center for Economic and Policy Research writes that state and local budget cutbacks are reducing growth significantly:

The state and local budget crises are leading to sharp cutbacks in spending. The S&L sector contracted at a 3.8 percent annual rate, subtracting 0.48 pp from growth in the quarter. Most of the cutbacks were in investment spending, which fell at a 14.7 percent annual rate. Governments apparently are opting to deal with their budget squeezes by putting off capital expenditures in order to continue to provide current services. This may be the best option but in the long-term this pattern of cutbacks will slow the growth of productivity. Federal spending grew at a 1.4 percent rate, but the government sector as a whole subtracted 0.37 pp from growth in the quarter.

There are policies on the table to address this, but with deficit mania catching fire in Washington, states and municipalities probably won’t receive much of a lifeline, and a waste in growth potential will ensue. The expected cutoff in unemployment benefits will also cut into growth as consumer spending shrinks. Relying solely on private investment and trade at this time will produce a low rumble of growth with mass unemployment and an economy moving too slowly to create many jobs. Policymakers who take their foot off the pedal at this point risk consigning millions to a reduced standard of living and a dangerous low-growth cycle.

David Dayen

David Dayen