Before anyone starts thinking that Washington suddenly has gotten religion on spending, the bulk of the federal government cuts came from defense spending, which plunged 8.1 percent.

State and local governments, facing the necessity to balance their budgets against declining revenue (not to mention the specter of Meredith Whitney'smuni bond default forecast) likely will continue to cut, though that's not as certain with their federal counterpart. Washington's drop in spending came after a 19.1 percent decrease in the fourth quarter of 2011.

"The government spending plunge is unlikely to repeat for a third quarter (in 2012 at least) and an inventory drag in 2Q only masks moderate demand gains," Citigroup economist Steven C. Wieting said. "But the 1Q GDP data should limit remaining optimism that U.S. economic growth will accelerate significantly this year."

So what does this all mean?

Investors are watching the Federal Reserve closely for signs that the U.S. central bank might step in and provide more stimulus once Operation Twist ends in June.

The Fed currently is buying long-dated bonds and selling shorter-dated notes in an effort to stimulate risk and drive down lending costs. At the same time, it is rolling over the $2.8 trillion already on its balance sheet in the form of Treasurys as well as mortgage and other debt.

Some are hoping that Chairman Ben Bernanke and Co. will be willing to step in with a third round of balance sheet expansion — quantitative easing — to keep goosing the market through the economic trudge. But the GDP progress, halting as it is, likely will forestall if not completely derail QE3 prospects.

It's all part of "Bad Goldilocks" phenomenon, in which the economy doesn't grow quickly enough to inspire confidence but moves just enough to keep the Fed at bay. Central bank critics worry that all the liquidity efforts will spur inflation, not to mention uncertainty over what happens once the Fed has to start unwinding all that debt it is holding.

Also remember: Out there not so far in the future is the "fiscal cliff" of which Bernanke has warned will appear if Congress cannot agree on deficit reduction and thus face an automatic round of steep spending cuts and tax increases at the end of 2012.

"Enthusiasm for equities is likely to be curbed by a turn in the US profit cycle, an absence of additional unconventional monetary stimulus from the Fed and a renewed flare-up of the crisis in the euro-zone," John Higgins, senior market economist at Capital Economics, said in a note.