Growth spurt for economy at end of 2010. Five clues to what's next.

The US economy grew at a relatively healthy 3.2 percent annual rate in the final quarter of 2010, the Commerce Department reported Friday. That is an improvement from a 2.6 percent rate in the third quarter.

But to many Americans, it's hard to tell if anything is really better. Buried in the new report are clues to why that is – and what might happen to the economy in the year ahead. Here are five things that the government’s preliminary report on gross domestic product reveals about the health of the economy.

1. Government spending slows

Gary Hershorn/Reuters
A woman walks in front of a snow plow clearing a sidewalk in Hoboken, N.J., Jan. 7, 2011. States including New Jersey are asking Congress for help with their snow-removal budgets.

Government spending shrank sharply at the end of the year, compared with the third quarter. While the private sector grew at a robust 4.1 percent annual rate, Uncle Sam and state and local governments tightened their belts, laying off workers and cutting services.

Some of this end-of-year reduction in government expenditure can be attributed to the Department of Defense, which had run up its third-quarter spending to use allocated money by the end of the fiscal year, which is Sept. 30. “If you don’t spend it, you lose it,” quips David Wyss, chief economist at Standard & Poor’s in New York.

But the downsizing of government is likely to continue this year. For example, in the past, Congress has sometimes approved a sizable supplemental budget to pay for things like snow removal in the District of Columbia. Now, states such as New Jersey and Connecticut are asking the feds for some help with their snow-removal budgets. But Mr. Wyss doubts that this new Congress, with many new members intent on reducing government spending, will be inclined to help them out.

Less government spending will be a bit of a drag on the economy in the coming year, says Wyss. State and local governments face tough decisions on their fiscal 2012 budgets, which begin in July.

“Is this all bad?” asks economist Bob Brusca of Fact & Opinion Economics in New York. “In the longer run we are moving resources to the much faster-growing private sector.”

1 of 5
of stories this month > Get unlimited stories
You've read of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.