Editor's note: The following is the first of a six-part series on government budgets and government spending that comprise the Keating Report mid-year 2011 forecast. The topics we are covering include: federal budgets, transportation projects, state tax revenue, local government budget trends, ARRA-funded construction and government spending.

A slightly more robust economy and rising government revenues signal some improvement in government budgets for the remainder of 2011. Higher consumer spending and gross domestic product growth (albeit at a slow 1.8 percent annual rate in the January-March quarter), low inflation, higher consumer savings rates and slow but steady hiring in the U.S. work force are all signs that the economy may be coming out of its deep freeze.

However, the continuing budget battle in Congress to raise the federal debt ceiling and curb government spending is a wild card that everyone will be monitoring closely. As part of the debt ceiling discussions, both Democrat and Republican lawmakers are considering plans that could trim $4 trillion to $6 trillion off the federal budget over the next 10 years.

Even as lawmakers debate government spending cuts, government purchases of goods and services will grow a little in the remaining quarters of 2011, and expand by about 1.4 percent in 2012, according to the latest analysis from St. Louis, Mo.-based consultants Macroeconomic Advisers (MA). Total government purchases of goods and services in the U.S. (also called government consumption and gross investment) will reach $3.06 trillion in the fourth quarter of 2011 versus $3.03 trillion in 2010, according to MA. State and local governments will account for $1.8 trillion, while federal purchases will exceed $1.2 trillion.

Federal agencies will face tighter budgets, confirms Brian Riedl, the Heritage Foundation's lead budget analyst. "The GOP House has essentially frozen non-defense discretionary spending, which will partially counteract the natural rise in entitlement costs," Riedl says. The Washington-based Heritage Foundation is a research institute that formulates and promotes conservative public policies.

More budget uncertainty may result with the end of the stimulus funding program on June 30. The stimulus program, which was spawned by the American Recovery and Reinvestment Act of 2009 (ARRA), showered billions on governments throughout the U.S.

Government contractors should continue to scope out stimulus dollars still available, urges Henry Chou, associate vice president at Seattle-based Onvia, which tracks government-contracting opportunities for U.S. companies. "Tens of billions in stimulus dollars are still out there to be won. In fact, of the $275 billion in ARRA spending that was designated for projects, only about $80 billion had actually been awarded to contractors as of May 2011. In the construction and building supplies sector in particular, Onvia is tracking about $81 billion in ARRA-related contracts at the state and local level, of which only about $28 billion has been awarded," Chou says.

He offers this advice: "With the housing market's recovery continuing to lag, construction contractors should keep looking to government agencies for ARRA work, not only to tide them over but to help them grow their businesses."

View additional installments of our second-half 2011 forecast as well as the January 2011 forecast.

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