Most Read: Business

DJIA
0.00%
S&P 500
-0.25%
NASDAQ
0.09%
 Last Update: 11:02 PM 11/28/2014

World Markets from      

 

Other Market Data from      

 

Key Rates from      

 
Political Economy
Posted at 06:04 PM ET, 07/28/2011

No rosy outlook for Friday’s GDP report

So just how bad was it?

That’s the question that new data on the nation’s overall economic growth will answer Friday morning when the Commerce Department releases its report on gross domestic product from April through June.

And the only sure thing is that it will not inspire dancing in the streets.

The consensus forecast of economists surveyed by Bloomberg is that GDP rose at a 1.8 percent annual rate in the second quarter, about the same as the 1.9 percent rate of growth in the first quarter. Some leading forecasters—particularly those who update their estimates most frequently—have lowered their projections in the last few days as other data has trickled in. Macroeconomic Advisers, for example, projects growth was 1.3 percent last quarter.

But even if the number comes in somewhat higher than economists are expecting, it will be no cause for celebration. The U.S. economy is capable of growing at about 2.5 percent a year over the longer term, as the population increases and workers become more productive. But when the economy grows at that rate, the labor market can only tread water — accommodating the rise in the labor force, but unable to put the millions of Americans still unemployed back to work.

So, what happens to employment when the nation’s economic growth stays below that 2.5 percent rate, as it has in the first half of this year? The U.S. jobless rate has risen for three months straight.

Among the major culprits in keeping job seekers out of work are the financial struggles faced by state and local governments that are cutting tens of thousands of jobs and billions of dollars in spending each month to balance their budgets. State and local government cutbacks subtracted 1.2 percentage points from first quarter GDP, the Commerce Department has estimated. Friday’s GDP release will show the amount of drag in the second quarter.

States were able to delay those cutbacks when they received hundreds of billions of dollars from the federal government in 2009 to ride out the
recession. That money has all been spent, and now states are being forced to slash spending and raise taxes to comply with balanced-budget requirements. Congress has given little serious consideration to reviving the stimulus program.

When the federal government initiated a temporary reduction in the payroll tax at the start of the year, many economists upgraded their expectations for 2011 growth. But as states and local jurisdictions reduce jobs, the effect wipes out the benefit of having more after-tax dollars in American workers’ pockets.

What does this all mean for the economic outlook? As Goldman Sachs
economists noted in a report this week, there are two ways of looking at it: On one hand, the fact that the private sector continues to expand even as governments shrink offers hope that the recovery in households and businesses is well-entrenched.

On the other hand, governments aren’t finished tightening their budgets. Aside from the reductions at the state and local levels, the outcome of the current federal debate over reducing the nation’s debt is likely to include sharp spending cuts over the coming year.

“The pace of fiscal retrenchment is likely to pick up in coming
years,” wrote Jan Hatzius, the chief economist at Goldman Sachs, “and
this year’s experience confirms our view that this adjustment is
likely to weigh on GDP growth.”

By  |  06:04 PM ET, 07/28/2011

 
Read what others are saying
     

    © 2011 The Washington Post Company