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The economy grew at its slowest pace in two years, with gross domestic product (GDP) increasing at a 3.1 percent annual rate in the first quarter of the year, according the Commerce Department (see figure 1).

While growth seems to have been fairly well balanced across consumption and investment, the external sector continues to remain unbalanced with export growth just half of import growth.

In addition, prices increased more rapidly than in the past several years, with the overall GDP price index increasing at a 3.3 percent annual rate. Excluding food and energy, the price index increased by 3.1 percent, compared with an increase of 2.0 percent in the fourth quarter last year. Finally, the price index for gross domestic purchases (prices paid by U.S. households) increased by 3.0 percent in the first quarter.

The increase in prices and the deceleration of output growth raises questions about the sustainability of the current recovery. Data released over the past month shows additional signs of weakness. Were the economy to backslide, it is unclear what policy response would be forthcoming. The Federal Reserve is on a path to higher interest rates to combat the potential of higher inflation, and the size of the federal budget deficit may preclude aggressive fiscal policy.

We are thus in a precarious position: economic growth is neither strong enough to significantly improve the jobs picture nor improve many of our economic challenges such as rising poverty rates. And at the same time, short-term and long-term risks to the economy remain. In the short-term, higher interest rates might cool the red-hot housing market, and high oil and gas prices threaten to eat into the disposable income of many middle-class Americans. In the long-run, high budget and trade deficits will place a drag on our overall economic well-being. Finally, failure to invest at the federal level in our national human and physical infrastructures-through funding education, scientific research, roads, etc=-will lead to a weaker economy in the future.

John S. Irons, Ph.D., is the director of tax and budget policy at the Center for American Progress.

Figure 1.
Figure 1

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