Monday, June 14, 2010

Report: State and Local cutbacks may cut 0.25% from GDP

by Bill McBride on 6/14/2010 11:03:00 AM

From Bloomberg: Economy in U.S. Slows as States Lose Federal Stimulus Funds (ht Brian)

State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 ... said Mark Zandi, chief economist at Moody’s Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May.

“The budget cutting that is dead ahead will be a significant impediment to economic growth later this year into 2011,” he said in an interview.
I've been forecasting a 2nd half slowdown in GDP growth based on:

1) less Federal stimulus spending in the 2nd half of 2010. The decline in stimulus will probably be a drag of about 0.5% on GDP growth by Q4.

2) the end of the inventory correction. The inventory adjustment contributed 3.8% in Q4 2009 of the 5.6% annualized growth rate, and 1.65% of the 3.0% GDP growth (annualized) in Q1 2010. This will probably fall to zero - or even subtract from growth.

3) more household saving leading to slower growth in personal consumption expenditures,

4) another downturn in housing (lower prices, less residential investment),

5) slowdown in China and Europe and

6) cutbacks at the state and local level. According the Mark Zandi, this will subtract about 0.25% from GDP growth.

David Rosenberg of Gluskin Sheff + Associates wrote this morning:
"A double-dip, admittedly, is not yet a sure thing but I am definitely warming to the view."
I still think we will avoid a double dip, but I expect growth to be sluggish and choppy.

A quarter point here, and half point there ... and pretty soon you have some real drag.