Economy’s Biggest Drag Right Now Is Government

Government has become its own worst enemy when it comes to the economy, with public spending putting a damper on growth that otherwise continues at a steady if unspectacular pace.

Friday’s gross domestic product report confirmed what a drag government can be: While consumer spending grew at a 2.9 percent clip, state and local governments cut back spending by 1.2 percent on an annualized basis and the federal government pulled back by 5.6 percent.

As a result, the GDP just a 2.2 percent improvement. The report disappointed economists, some of whom had the number as high as 3 percent and beyond, and cast an uncertain future on a stock market dependent on Federal Reserve stimulus for growth.

“None of this is all that surprising, so where is the miss?” wondered Brown Brothers Harriman global currency strategist Marc Chandler, after noting some fairly pedestrian and in-line quarterly growth results. “Contrary to what passes as conventional wisdom, the main drag is coming from the government itself.”

Before anyone starts thinking that Washington suddenly has gotten religion on spending, the bulk of the federal government cuts came from defense spending, which plunged 8.1 percent.

State and local governments, facing the necessity to balance their budgets against declining revenue (not to mention the specter of Meredith Whitney’s muni bond default forecast) likely will continue to cut, though that’s not as certain with their federal counterpart. Washington’s drop in spending came after a 19.1 percent decrease in the fourth quarter of 2011.

“The government spending plunge is unlikely to repeat for a third quarter (in 2012 at least) and an inventory drag in 2Q only masks moderate demand gains,” Citigroup economist Steven C. Wieting said. “But the 1Q GDP data should limit remaining optimism that U.S. economic growth will accelerate significantly this year.”

Read more at CNBC.