While the weakness of the housing sector and continued financial volatility are two key reasons for the frustratingly slow pace of the recovery, other factors also may restrain growth in coming quarters. For example, state and local governments continue to tighten their belts by cutting spending and reducing payrolls in the face of ongoing budgetary pressures, and federal fiscal stimulus is being withdrawn.
There is ample room for debate about the appropriate size and role for the government in the longer term, but – in the absence of adequate demand from the private sector – a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring.