Gross domestic product (GDP) rose by a 4.2 percent annual rate in the first quarter, according to the Bureau of Economic Analysis. This is about the same as the 4.1 percent rate from the last quarter of 2003, and shows the economy growing at a steady, if not exceptionally strong, rate. However, forecasters had expected growth to come in at a stronger 5 percent rate.

Excluding spending on national defense, the economy grew at an annual rate of just 3.5 percent. In addition, cutbacks at the state and local level are providing a drag on the economy -- lowering GDP growth by 0.3 percentage points. Declines in state and local expenditures -- largely due to funding crises at the state level -- have contributed to a lower growth four of the last 5 quarters. Federal tax policy has contributed to the weak financial situation of the states, and we can expect additional harm to growth in the future.

An increase in the rate of inflation as measured by the GDP deflator is of additional concern. The price index rose at an annual rate of 2.5 percent compared with 1.5 percent from the previous quarter. Prices rose across the board, but were most prevalent in non-durable consumer goods, and imports.

The overall economy has begun to stabilize, but significant risks remain. Employment continues to be a concern, especially in the manufacturing sector, with the economy failing to provide enough jobs. An acceleration of the inflation rate will put pressure on the Federal Reserve to raise interest rates. Indeed, market rates have already begun to rise, thus threatening the housing market, which has been exceptionally strong throughout the past few years. Fewer home sales, and less mortgage refinancing will lead to less consumer consumption. In addition, higher rates will mean a greater interest burden for borrowers -- a problem with potentially huge consequences given high levels of private debt.

Failure to address economic weakness -- in particular for those most in need -- continues to be a hallmark of current fiscal policy.