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The answer may lie in city halls and governors' mansions across the country, where budget constraints are forcing cuts that could be putting a bigger drag on national growth than many economists currently believe.

The first look at third-quarter gross domestic product data on Friday is likely to show the economy expanded at a 2.0 percent annualized pace, according to the consensus view of economists polled by Reuters, slightly faster than in the second quarter but still not robust enough to put a dent in high unemployment.

"The U.S. economy remains stuck in a sub-potential growth rut," said Michael Gregory, an economist with BMO Capital Markets in Toronto.

The range of forecasts, however, is wide, stretching from 1.0 percent to 3.6 percent. State and local government spending is one big wild card, said John Silvia, chief economist at Wells Fargo in Charlotte, North Carolina.

(For a graphic on state and local government spending and jobs, see r.reuters.com/cex79p)

State and local governments normally account for a little more than 12 percent of GDP, outpacing the federal government, which has been clocking in just above 8.0 percent since last year (and had been closer to 7.0 percent before the recession).

Most states and municipalities have balanced budget rules, which means when revenues fall, something has to go. In September, it was jobs.

State and local governments shed 83,000 workers last month, a huge surprise that made the overall employment picture look considerably darker than economists had expected.

This suggests a significant spending pullback that could reduce third-quarter GDP. In the second quarter, state and local government added a tiny fraction to growth, but it had subtracted from GDP in five of the previous six quarters.

Figuring out precisely how it might affect GDP in the latest quarter is tricky. Economists have plenty of data on major economic categories such as consumer spending and exports, but there is little detailed information available on monthly or quarterly municipal budgets.

DIFFERENT STORIES, SAME ENDING

British GDP figures are also due this week and are likely to tell a very different story, with third-quarter growth slowing dramatically to just 0.4 percent after a surprisingly strong second-quarter jump of 1.2 percent.

(Unlike the United States, Britain does not report its GDP data as an annualized rate. Multiplying by four gives a close approximation to the U.S. method.)

Government spending is becoming an increasingly important growth factor in Britain, too. It plans to cut 500,000 public sector jobs and slash public spending as part of a push to get government finances back in order.

SGX is likely to offer as much as $8.3 billion for ASX in a statement expected as early as Monday, a source with knowledge of the deal told Reuters at the weekend.

"I think it's a matter between the Singapore Exchange and the Australian Exchange, and I can't see that raising competition issues for us," Australian Competition and Consumer Commission chief Graeme Samuel told Australian radio.

"We're much more focused on the potential for new competitors to enter into the Australian market in terms of stock exchange dealings."

A marriage of the SGX, Asia's second-biggest listed bourse, and the ASX, its third-largest, would mark Asia-Pacific's first major consolidation of exchanges in a move designed partly to ward off the threat of alternative trading systems.

SGX is set to unveil an offer for as much as A$48 a share to take over ASX in a cash and stock bid, the source said, with around 43 percent to be made in cash and the rest in SGX shares.

SGX said late on Sunday that it would make an announcement on Monday. ASX made no immediate comment on the Reuters report.

The ASX is due to lose its effective domestic monopoly next year, with a new entrant, Europe's Chi-X Australia Pty Ltd, expected to begin operation in 2011.

"We're aware of course of Chi-X and moves that they're making. And there are some issues there that we're examining with the Australian Stock Exchange and with other parties, just to try and make sure that they have an easier way in to provide real competition for stock market trading in Australia," Samuel said.

(Reporting by Rob Taylor in CANBERRA and Saeed Azhar in SINGAPORE; Editing by Mark Bendeich)

Investors also will face a blizzard of earnings, which many analysts believe will continue to support the rally that began early this month. But any disappointments in either earnings or outlooks could, of course, trigger a sharp sell-off.

What's more, the market is likely to continue to garner support from investors' hopes that the Federal Reserve will take more steps to stimulate the economy, in what is known as "quantitative easing" or "QE2." The Fed is expected to unveil its initial commitment under QE2 at its November 2-3 meeting.

The Chicago Board of Options Exchange (CBOE) Volatility Index, or VIX .VIX, a gauge widely used to measure investors' anxiety levels, fell 2.54 percent on Friday to close at 18.78, its lowest level since April. The VIX, which rose to near 50 in May, has been around or under 20 for the past two weeks.

Options traders note that there is a clear sign of extreme complacency in the VIX and that it is making the market more vulnerable than before.

"The 'market volatility' index will see a lot more volatility (this week) since it is at such low levels now," said Steve Claussen, chief investment strategist at online brokerage OptionHouse.com.

The iPath S&P 500 VIX Short Term Futures exchange-traded note, or ETN (VXX.P) is also at a new 52-week low of 12.83. The ETN offers directional exposure to volatility and is based off of the front two-month VIX futures.

"If you look at VIX futures, investors seem to be always preparing for something to trigger the volatility to spike up again, yet there is nothing major in the immediate future that justifies that," Claussen said.

The VIX futures were traded at around 21 for November and 24 for December, but going into 2011, they were showing an increase of 40 percent, trading above 26.

The VIX, widely known as Wall Street's fear gauge, is a 30-day risk forecast of stock market volatility. The index typically has an inverse relationship with the S&P benchmark as it tracks option prices that investors are willing to pay as protection on the underlying stocks.

Last week, the VIX instantly shot up nearly 12 percent on Tuesday when stocks suffered their steepest one-day decline since August after a surprising rate increase from China.

EARNINGS ON CENTER STAGE

Earnings will remain the center of attention this week. Many analysts predict that earnings will continue to support the market rally that kicked off October. If more companies report strong results, that could bolster sentiment, along with hopes for more Fed easing.

In the last week of October, 177 S&P 500 companies are due to report their balance sheets, of which seven are Dow components. Among them are energy giants Exxon (XOM.N) and Chevron (CVX.N) and technology giant Microsoft (MSFT.O). For details on earnings schedule, see <RESF/US>

S&P 500 earnings are expected to increase 28 percent for the third quarter from a year ago, up from a growth estimate of 24 percent last week, according to Thomson Reuters data.