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Fiscal-cliff deal no recipe for a robust economy

January 4, 2013
By CHRISTOPHER S. RUGABER , THE ASSOCIATED PRESS

WASHINGTON - Housing is rebounding. Families are shrinking debts. Europe has avoided a financial crackup. And the fiscal cliff deal has removed the most urgent threat to the U.S. economy.

So why don't economists foresee stronger growth and hiring in 2013?

Part of the answer is what Congress' agreement did (raise Social Security taxes for most of us). And part is what it didn't do (prevent the likelihood of more growth-killing political standoffs).

Article Photos

AP PHOTO
In this Tuesday, file photo, the dome of the Capitol is reflected in a skylight of the Capitol Visitor's Center in Washington. By delaying hard choices on spending, the fiscal cliff deal guaranteed more confrontation and uncertainty this year, especially when Congress must vote later this winter to raise the government’s borrowing limit. That’s likely to keep businesses cautious about hiring and investing.

By delaying painful decisions on spending cuts, the deal assures more confrontation and uncertainty, especially because Congress must reach agreement later this winter to raise the government's debt limit. Many businesses are likely to remain wary of expanding or hiring in the meantime.

One hopeful consensus: If all the budgetary uncertainty can be resolved within the next few months, economists expect growth to pick up in the second half of 2013.

"We are in a better place than we were a couple of days ago," Chad Moutray, chief economist for the National Association of Manufacturers, said a day after Congress sent President Barack Obama legislation to avoid sharp income tax increases and government spending cuts. But "we really haven't dealt with the debt ceiling or tax reform or entitlement spending."

Five full years after the Great Recession began, the U.S. economy is still struggling to accelerate. Many economists think it will grow a meager 2 percent or less this year, down from 2.2 percent in 2012. The unemployment rate remains a high 7.7 percent. Few expect it to drop much this year.

Yet in some ways, the economy has been building strength. Corporations have cut costs and have amassed a near-record $1.7 trillion in cash. Home sales and prices have been rising consistently, along with construction. Hiring gains have been modest but steady. Auto sales in 2012 were the best in five years. The just-ended holiday shopping season was decent.

Bernard Baumohl, chief global economist for the Economic Outlook Group, thinks the lack of finality in the budget fight is slowing an otherwise fundamentally sound economy.

"What a shame," Baumohl said in a research note Wednesday. "Companies are eager to ramp up capital investments and boost hiring. Households are prepared to unleash five years of pent-up demand."

The economy might be growing at a 3 percent annual rate if not for the threat of sudden and severe spending cuts and tax increases, along with the haziness surrounding the budget standoff, says Ethan Harris, co-director of global economics at Bank of America Merrill Lynch.

 
 

 

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