The U.S. economy is showing signs of slipping back into a recession thanks in part to financial strain at the state and local levels, says Meredith Whitney, head of Meredith Whitney Advisory Group.
Whitney, who accurately called the financial crisis of a couple of years ago, said in late 2010 that widespread defaults were possible at the municipal levels.
That hasn't happened yet, but state and local economies — as well as the national one — are in for tough times ahead, debt-ceiling impasse notwithstanding.
"I think you are getting increasing signs that we are really at risk for a double dip because our GDP number on Friday was an indication that states and local governments, 12 percent of GDP, are really pulling back," Whitney tells CNBC.
(Getty Images photo)
Gross domestic product grew 1.3 percent in the second quarter of 2011, below private-sector forecasts for 1.8 percent, according to the Commerce Department.
While the debt-ceiling impasse was hard on everyone, states are in bad shape on their own regardless.
Federal stimulus money once pouring into local governments is drying up, and since 46 states are in the process of balancing their budgets, cuts to social programs and in contracts to private companies are going to rise.
"This affects the macro environment, this affects employment, this affects spending, this affects every corporation within the United States because so many corporations are reliant on contracts from state and local governments," Whitney says.
"So this [debt crisis] situation in D.C. exacerbates it, but the states are in a bad situation even without the situation in D.C."
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State and local governments that will be forced to make the most draconian cuts are the ones that were most tied to the housing boom and will end up slashing social programs and raising taxes, Whitney says.
"The states that have clean balance sheets and don't have anything to worry about, in areas that we call the emerging markets of the United States, are going to attract more businesses, have higher tax surpluses and not have to cut programs and not have to raise taxes."
Others agree that the economy is risking dipping back into recession, especially after the debt-ceiling impasse and its effects on confidence.
Congress is close to approving the government's $14.3 trillion debt ceiling and thereby steering the government away from default by Tuesday's deadline.
Ratings agencies have said the U.S. could lose its AAA rating if it defaults.
Even if the government does avoid missing its obligations, it's still unclear whether the damage the impasse has had on the country plus the enormous debt burden the government carries may prompt some agencies to downgrade the country's ratings.
"Growing uncertainty about the ultimate outcome inevitably has some negative effect on business capital investment and hiring as the Aug. 2 deadline approaches," says David Crowe of the National Association of Home Builders, according to CNN.
Other economists were less worried.
"If a deal appears imminent, there will not be any impact on GDP," says Bill Watkins, executive director of the Center for Economic Research and Forecasting, CNN adds.
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