Budget fights threaten US growth, hiring

Americans are expected to buy more this year, which will help boost US manufacturing output.

January 3, 2013
by The Canadian 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 US economy.

So why don’t economists foresee stronger growth and hiring for the country in 2013?

By delaying painful decisions on spending cuts, the deal passed at the last minute by Congress this week assures more confrontation and uncertainty, especially because lawmakers must reach agreement within a few months to raise the government’s $16.4 trillion debt limit so the U.S. can pay its bills. Many businesses are likely to remain wary of expanding or hiring until then.

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.”

The Jan. 1 fiscal cliff deadline was meant to force Congress and the Obama administration to finally face those issues and address chronic fiscal spending. Instead, they put off most of those questions and face more showdowns soon.

Five years after the Great Recession began, the US economy is still struggling to accelerate. Many economists think it will grow a meagre 2% or less this year, down from 2.2% in 2012. The unemployment rate remains a high 7.7%. 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.

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. “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% annual rate if not for the threat of sudden and severe spending cuts and tax increases, along with the haziness surrounding the budget standoff, said Ethan Harris, co-director of global economics at Bank of America Merrill Lynch.

Congress’ deal also postpones decisions on more than $100 billion in spending cuts for military and domestic programs, including the Medicare health care program and Social Security pension program. In doing so, it sets up a much bigger showdown over raising the government’s borrowing limit. Republicans will likely demand deep spending cuts as the price of raising the debt limit. A similar standoff in 2011 brought the government to the brink of default and led Standard & Poor’s to yank its top AAA rating on long-term US debt.

Here’s what the US can expect in 2013:


With further fights looming over taxes and spending, many companies aren’t likely to step up hiring. Congress and the White House will likely start battling over raising the debt limit in February.

Many economists expect employers to add an average of 150,000 to 175,000 jobs a month in 2013, about the same pace as in 2011 and 2012. That level is too weak to quickly reduce unemployment.

The roughly 2 million jobs Mark Zandi, chief economist at Moody’s Analytics, estimates employers will add this year would be slightly more than the 1.8 million likely added in 2012. Zandi thinks employers would add an additional 600,000 jobs this year if not for the measures agreed to in the fiscal cliff deal.

Federal Reserve policymakers have forecast that the unemployment rate will fall to 7.4%, at best, by year’s end. Economists regard a “normal” rate as 6% or less.


Factories appear to be recovering slowly from a slump last fall. The Institute for Supply Management’s index of manufacturing activity rose last month from November. And a measure of employment suggested that manufacturers stepped up hiring in December. Factories had cut jobs in three of the four months through November, according to government data.

Another encouraging sign: Americans are expected to buy more cars this year. That would help boost manufacturing output. Auto sales will likely rise nearly 7% in 2013 over last year to 15.3 million, according to the Polk research firm. Sales likely reached 14.5 million last year, the best since 2007. In 2009, sales were just 10.4 million, the fewest in more than 30 years.

And if Congress can raise the federal borrowing limit without a fight that damages confidence, companies might boost spending on computers, industrial machinery and other equipment in the second half of 2013, economists say. That would help keep factories busy.

©The Canadian Press