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Government

Austerity Holding Back US Recovery as GDP Growth Revised Downwards to 1.8%

(Analysis) The US BEA revised downwards the rate of growth (annualized) during the first quarter of 2013 by 0.6% to 1.8%. This is a relatively large revision for a third and final revision to real GDP, so it is safe to assume that this new estimate is a surprise to many observers.

The BEA identifies areas of the economy that are contributing to growth, as well as areas that are holding growth in the economy back. The first two areas called out by the BEA for dragging growth down are federal government spending and spending by state and local governments. This is further evidence of austerity, and the Congressional Budget Office estimates that government fiscal drag is holding back growth in the economy by 1-1.5%.

Policymakers should rapidly undo sequestration, then put in place a large stimulus to employ our economy’s factors of production that are lying fallow, before any further permanent damage is done. Unfortunately, political inertia promises more of the same: gridlock. No meaningful policy action by government is on the foreseeable horizon.

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