Cities hold key to higher GDP

The only question about the rate of US economic growth right now is which adjective fits best: sluggish or slumping.

The answer may lie in city halls and governors’ mansions across the country, where budget constraints are forcing cuts that could be putting a big drag on national growth.

The first look at third-quarter gross domestic product data on Friday is likely to show the economy expanded at a 2.0 percent annualized pace, according to the consensus view of economists polled by Reuters.

State and local governments normally account for a little more than 12 percent of GDP, outpacing the federal government, which has been clocking in just above 8.0 percent since last year.

Most states and municipalities have balanced budget rules, which means when revenues fall, something has to go. In September, it was jobs. State and local governments shed 83,000 workers last month, which made the overall employment picture look darker than economists had expected.

This suggests a significant spending pullback that could reduce third-quarter GDP.