A man looks into a shop window in lower Manhattan November 25, 2008 in New York City.
A man looks into a shop window in lower Manhattan November 25, 2008 in New York City. - 
Listen To The Story


Kai Ryssdal: We got a government economic report today that's officially called the National Income and Product Accounts, 4th quarter second estimate. More simply, it's a revised look at gross domestic product September through New Year's. And it turns out economic growth at the end of last year wasn't all it was cracked up to be.

The early estimate for the last quarter of 2010 was a growth rate of 3.2 percent, which would've been pretty darn nice. Today, the Commerce Department dialed that back to a more normal 2.8 percent rise. Turns out one of the things still dragging on the recovery was lower government spending, especially at the state and local level.

Our senior business correspondent Bob Moon explains.

Bob Moon: Even with today's downward revision, all-important consumer spending remained strong. But it's just as consumers finally seem to be picking up the slack, that lawmakers across the nation are engaging in the battle over spending cuts.

David Wyss: This is the wheel that's squeaking the loudest right now.

David Wyss is chief economist at Standard and Poor's. He says reductions in government purchases could cost the country half a percentage point in economic growth this year.

Wyss: State and local governments actually spend more than the federal government. It's all the teachers, the police. This is over 10 percent of GDP.

Purchases and investments by state and local governments fell by almost 2.5 percent at the end of last year, compared to the same quarter in 2009. Wyss says this is happening earlier than expected, but that's not necessarily worrisome. In fact, he suggests, it could be a good thing.

Wyss: Look, the sooner you make cuts, the easier they are to make. If you make the cuts now, they won't have to be as drastic, hopefully, down the road, as they would otherwise.

Just how significant this will be to the overall economy is a subject of some debate. At MF Global, chief economist James O'Sullivan points out federal help to state and local governments is just now running out.

James O'Sullivan: At this point, we're pretty much at the peak for federal grants and aid as result of the fiscal stimulus package, so we will see a decline, clearly, over the next few quarters.

But O'Sullivan also notes that as those training wheels fall away, the economy is picking up some speed.

O'Sullivan: Tax receipts have already started to accelerate. In fact, tax receipts are up about 5 percent year over year right now for state and local governments, and as the economy continues to improve, as we expect it will, if anything those tax receipts should strengthen some more.

O'Sullivan says he's hopeful that will be enough to offset the end of emergency federal support.

I'm Bob Moon for Marketplace.