Uncertainties about federal government spending in 2013 cast a long shadow on the outlook for the economy
February 11, 2013
- Uncertainties about federal government spending in 2013 cast a long shadow on the outlook for the economy
The fiscal saga continues in Washington. The debt ceiling issue has been postponed to mid-May 2013. In the meanwhile, automatic spending cuts are scheduled to commence on March 1. Rhetoric from Washington suggests that these spending cuts are not likely to be overridden, triggering declines of $71 billion in discretionary spending and $14 billion in mandatory spending. Defense-related spending cuts are estimated to be roughly 50% of the total. However, the story could change between this writing and March 1.
Another fiscal deadline looming large is the expiration of the continuing resolution on March 27, 2013. If additional appropriations are not provided, nonessential functions of the government will cease after March 27. In other words, a temporary shutdown of the federal government is on the radar screen.
At the moment, our forecast does not assume any sharp automatic cuts in federal government spending. We are watching closely and future revisions will reflect fiscal developments as they evolve.
Real GDP of the US economy is projected to expand at a slow pace in the first half of the year reflecting improvements in the private sector and fiscal tightening at the same time. A significant positive offset to fiscal consolidation is a large accumulation in inventories, primarily in the first quarter, following a large reduction in inventories during the fourth quarter.
Key elements of the current forecast:
- As result of the expiration of the 2.0% payroll tax cut, consumer spending is predicted to rise only 0.6% in the first quarter, but stronger momentum is predicted for the rest of the year. The latest Senior Loan Officer Survey from the Federal Reserve points to small improvement in the demand for consumer loans, with the auto component looking as the strongest compared with other types of consumer borrowing.
- Residential investment expenditures are predicted to add to growth during 2013, after a strong performance in 2012. Permit extensions for construction of new single-family and multi-family homes continue to support this forecast. The 8.3% increase in the CoreLogic Home Price Index during 2012 is noteworthy not only for its magnitude but it is also the first annual increase since 2006. Going forward, home prices are likely to post a measured gain as the favorable impact of a low base wanes.
- The outlook for exports from recent months has not changed. Weak economic conditions in the eurozone combined with moderate growth in Asia are factors that will continue to weigh on the performance of exports during the year, despite the generally weak position of the dollar against the euro and the yen.
- The unemployment rate edged up one notch to 7.9% in January; revisions of payroll employment reflect an improved underlying trend of hiring. The participation rate has stalled at 63.6% in the last few months. If discouraged workers reenter the labor force owing to a stronger business momentum in the latter part of the year, it would trim the pace of decline in the unemployment rate. The interplay of this and the recent pace of job creation imply only a gradual decline of the unemployment rate to 7.3% by the end of the year.
- Inflation as measured by the personal consumption expenditure price index (1.3% year-to-year increase in December 2012) is currently running below the Fed’s long term target of 2.0% and it is expected to remain contained given projections of economic growth. Therefore, the favorable inflation but worrisome employment data validate the Fed’s focus on employment and growth in their policy deliberations.