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January 4, 2013 6:27 pm
In every year since the US recovery began in 2009, economists have been waiting for a big surge in the economy, and it was always due to arrive next year.
At the end of 2009, the end of 2010 and the end of 2011 there were forecasts of 3 or 4 per cent growth in the year ahead. It never happened. Growth has been stuck at about 2 per cent.
The release of more so-so payrolls figures on Friday – 155,000 extra jobs is respectable but suggests only sluggish growth of about 2 per cent – confirms what most economists now expect for 2013. Most have abandoned their optimism. They expect another year of mediocre growth.
The reason is that they can no longer see where the demand is to support a rapid expansion. From 2010 to 2012, government stimulus was supporting the economy, and so if consumers slowed their debt repayments there was the potential for speedy growth.
Now fiscal stimulus is going into reverse – the fiscal cliff deal raises income taxes and ends a temporary 2 percentage point reduction in payroll taxes – so a solid recovery in the private sector is needed merely to keep the overall economy on track.
“The main thing is really the increase in fiscal drag,” says Jan Hatzius, chief economist of Goldman Sachs in New York, who is including more than a percentage point of fiscal tightening in his overall 2013 US growth forecast of 1.8 per cent.
Ethan Harris, head of US economics for Merrill Lynch, comes to a similar conclusion with his 2013 growth forecast of 1.6 per cent. He expects weak growth in the first half as the shock of fiscal tightening takes effect and then a pick-up later in the year.
“This is going to be another one of those years where you have a bit of a dead spot in the economy before you get back to normal growth,” he says.
Compounding the squeeze is the fact that the fiscal cliff deal did not raise the federal debt limit and only delayed big “sequester” cuts to spending until the end of February. “They haven’t eliminated uncertainty about fiscal policy,” says Mr Harris.
This dreary outlook is despite signs that the fundamentals of the economy are healing. The housing market appears to have bottomed and most analysts are pencilling in a decent rise in construction this year. The trouble is, with so little building activity going on, it would take a huge percentage rise to make much difference to the overall outlook.
Joseph LaVorgna, the chief US economist at Deutsche Bank in New York, includes this fundamental improvement in his more optimistic outlook of 2.3 per cent growth from the fourth quarter of 2012 to the fourth quarter of 2013.
“You kind of get the self-sustaining aspect of the recovery to really take hold,” he says, referring to a recovering housing market, more jobs, greater consumer spending, and better availability of bank credit.
Consumer spending – by far the largest part of overall demand – is crucial to the prospects for growth. Households have reduced their debt burden in the past five years. If they stop paying down debts, then in theory they could increase consumption by at least as much as the growth in their incomes, if not more.
In practice, though, a debt-fuelled consumer expansion is unlikely to drive the economy forward as it did 10 years ago – even if that were desirable. Consumers may dip into their savings a little, to make up for the loss of the payroll tax cut, but barring a surge in house prices that makes them feel rich again the world’s largest economy is set to plod forward in 2013.
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