Cities hold key to healthier GDP

By Emily Kaiser

WASHINGTON (BestGrowthStock) – The only question about the rate of U.S. economic growth right now is which adjective fits best: sluggish or slumping.

The answer may lie in city halls and governors’ mansions across the country, where budget constraints are forcing cuts that could be putting a bigger drag on national growth than many economists currently believe.

The first look at third-quarter gross domestic product data on Friday is likely to show the economy expanded at a 2.0 percent annualized pace, according to the consensus view of economists polled by Reuters, slightly faster than in the second quarter but still not robust enough to put a dent in high unemployment.

“The U.S. economy remains stuck in a sub-potential growth rut,” said Michael Gregory, an economist with BMO Capital Markets in Toronto.

The range of forecasts, however, is wide, stretching from 1.0 percent to 3.6 percent. State and local government spending is one big wild card, said John Silvia, chief economist at Wells Fargo in Charlotte, North Carolina.

(For a graphic on state and local government spending and jobs, see http://r.reuters.com/cex79p)

State and local governments normally account for a little more than 12 percent of GDP, outpacing the federal government, which has been clocking in just above 8.0 percent since last year (and had been closer to 7.0 percent before the recession).

Most states and municipalities have balanced budget rules, which means when revenues fall, something has to go. In September, it was jobs.

State and local governments shed 83,000 workers last month, a huge surprise that made the overall employment picture look considerably darker than economists had expected.

This suggests a significant spending pullback that could reduce third-quarter GDP. In the second quarter, state and local government added a tiny fraction to growth, but it had subtracted from GDP in five of the previous six quarters.

Figuring out precisely how it might affect GDP in the latest quarter is tricky. Economists have plenty of data on major economic categories such as consumer spending and exports, but there is little detailed information available on monthly or quarterly municipal budgets.

DIFFERENT STORIES, SAME ENDING

British GDP figures are also due this week and are likely to tell a very different story, with third-quarter growth slowing dramatically to just 0.4 percent after a surprisingly strong second-quarter jump of 1.2 percent.

(Unlike the United States, Britain does not report its GDP data as an annualized rate. Multiplying by four gives a close approximation to the U.S. method.)

Government spending is becoming an increasingly important growth factor in Britain, too. It plans to cut 500,000 public sector jobs and slash public spending as part of a push to get government finances back in order.

“A key issue is how consumer and business confidence respond to the (budget cutting) plans, the question being whether fears of austerity provoke a rise in precautionary saving or whether a sense that the deficit problem is being addressed provides a boost to confidence,” Barclays Capital economist Simon Hayes said.

With government spending slowing in both regions, central banks are under increasing pressure to pick up the slack.

This week’s GDP report will be the last major piece of economic data that the U.S. Federal Reserve weighs before its next policy-setting meeting on November 2-3.

Wall Street is convinced the Fed will announce another round of money printing to try to reinvigorate the recovery at the conclusion of that meeting.

As for the Bank of England, the next policy move is less clear because its members remain deeply divided on the path of economic growth and inflation.

Barclays’ Hayes said the GDP report on Tuesday “could be instrumental, with a very weak outturn potentially galvanizing those in the middle of the… pack into action.”

Cities hold key to healthier GDP