GDP Revised Down

Watch this space.

One of the reasons we all should ignore the puffery in the markets about the nature of the recovery is that the economy is still subject to significant risks. We all know and talk about the high level of unemployment, almost accepting it now as part of our near term fate. What we should be worrying about also is how that problem is about to be made worse by the fiscal crises at the state and local government level of the economy.

This is the most immediate lesson we can draw from today’s release of the revised fourth quarter 2010 GDP figures.

Recall that the original release had growth at a 3.2% annual rate. That’s the sort to platform from which we could reasonably expect growth to accelerate as household and corporate imbalances are worked off. Once expectations about the future improve, consumption and investment both should take off and propel us to higher growth for a while before we settle back down at a more sustainable rate. Indeed we have seen signs of confidence increasing and investment rising, making this typical recovery narrative very plausible. Which is why we see it stated so often in the media.

But.

Today’s revision should wake us up to the damage being wrought by the state level fiscal crisis. Yes, the revision includes a downward move for consumption – from 4.4% to 4.1%, but the big hit to growth comes from state government spending cuts. The original estimate of growth included only a -0.9% decline in state government spending. This release makes that decline much larger, at -2.4%. Therein lies the danger ahead. We are all aware of the enormous head of steam now building to slash government spending. That sounds very antiseptic when expressed in accounting terms. And balanced budgets sound very virtuous. But a cut in spending mean a cut in jobs. It means cuts in purchases from business, which, in turn, implies downstream cuts in jobs as well. Given the current mood, and the zeal of those intent on cutting spending, I think we can expect more of these negative numbers going forward. We are running a serious risk of undoing the good work done by the stimulus.

Enough said.

We should all revise down our projections for 2011. The cost cutters are at work.