Like a steam engine leaving the station, the American economy is gathering momentum: the wheels are turning, the engine is pumping and the engineers have opened the throttle full bore. If only Washington would get out of the way.
The U.S. economy expanded at a 2.4 percent annual rate during the first quarter, down a tenth of a point from an initial estimate, according to revised figures from the Commerce Department released on Thursday. Economists had forecast a 2.5 percent gain, the initial reading reported by the government last month.
Still, the report follows a string of economic data—from rising home prices to improved consumer confidence—offering more evidence that the economy continues to repair the widespread damage inflicted by the 2008 financial collapse.
But the headwinds from federal spending cuts are expected to blow harder later this year. That could test the underlying strength in spending by consumers and businesses that is offsetting the drag from cuts in government spending, which accounts for roughly 20 cents of every dollar of GDP.
"We've seen some false dawns in this recovery before—times where it looked like the economy was ready to step it up, and then it kind of petered out," said Joshua Feinman, chief global economist with Deutsche Asset and Wealth Management.
Government belt-tightening started five years ago as a sharp drop in both property and income taxes forced state and local governments to slash budgets, pare services and lay off workers. A massive federal stimulus package helped blunt some of the pain, but those funds have largely dried up.
Now, as state budgets are stabilizing, an $85 billion federal budget-balancing package of tax hikes and spending cuts is taking another bite out of gross domestic product.
"The ongoing fiscal contraction is now the biggest obstacle holding back the recovery," said economists at Capital Economics in a note to clients this week.