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Political Economy
Posted at 10:33 AM ET, 07/29/2011

GDP shocker: ‘Much of the drag was government’

Investors are reeling from the second quarter 2011 GDP report out Friday morning—the Dow Jones Industrial Average plunged 1 percent within the first half hour of trading. Is the outlook for the U.S. economy really this bleak?

John Ryding and Conrad DeQuadros of RDQ Economics called it a “shockingly weak GDP report.” Ian Sheperdson, chief U.S. economist for High Frequency Economics said that while the second quarter GDP growth of 1.3 percent was below consensus estimates, “the real shock” is that Q1 2012 growth was revised down to just 0.4 percent from 1.9 percent.

“Overall this is grim,” he wrote in a research note.

First the good news: Augustine Faucher, director of macroeconomics for Moody’s Analytics, points out that business investment remained strong and in fact accelerated from the first quarter.

“Especially notable was a strong pickup in nonresidential construction. And homebuilding also contributed to growth in the second quarter, after subtracting from it in the first,” Faucher wrote in a note to clients.

Faucher also said that homebuilding seems to be coming off its bottom.

So what was the problem?

Government, according to Faucher. “The major drag came from government, on both the federal and state and local sides. Government subtracted 1.2 percentage points from growth in the first quarter, with the federal government accounting for about two-thirds of that,” he said.

“It is vital that Congress and the Obama administration quickly resolve the impasse over the debt limit. Failure to do so could shake business and consumer confidence, cause interest rates to move sharply higher, and lead to massive federal spending cuts that would quickly push the U.S. back into recession,” Faucher wrote.

By  |  10:33 AM ET, 07/29/2011

 
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