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

[RedEarth]

via Caculated Risk......

Fed Econ Letter: State budget crisis poses "modest risk to national recovery"

Mark Zandi, chief economist at Moody’s Analytics, recently estimated that state and local cutbacks may cut 0.25% from U.S. GDP in 2010 and 2011.

But this is just one drag on the economy. 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 3.79 percentage points in Q4 2009 of the 5.6% annualized growth rate, and 1.88 percentage points of the 2.7% GDP growth (annualized) in Q1 2010. This will probably fall close to zero in the 2nd half (maybe even slightly negative).

3) more household saving leading to slower growth in personal consumption expenditures. The personal saving rate increased to 4.0% in May, and will probably rise further in the 2nd half.

4) another downturn in housing (lower prices, less residential investment). This might subtract 0.25 to 0.5 percentage points from growth in the 2nd half.

5) slowdown and financial issues in Europe and a slowdown in China,

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

As I've noted before, a quarter point here, and half point there ... and pretty soon you have some real drag.

http://www.calculatedriskblog.com/2010/06/fed-econ-letter-state-budget-crisis.html