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Sunday, December 16, 2012

NY Times: Sunnier Forecast, D.C. Shadow

by Calculated Risk on 12/16/2012 03:38:00 PM

From Catherine Rampell at the NY Times: Economic Forecast Is Sunnier, but Washington Casts a Big Shadow

Economists see a number of sources of underlying strength in the economy, but for the growth to gain traction, they say, political leaders need to avoid the broad tax increases and spending cuts now being debated.

The nascent housing rebound, the natural gas boom, record profit margins, a friendlier credit market for small businesses, along with pent-up demand for autos and other big purchases, could in combination unleash growth and hiring that the economy needs.

“Underneath all the shenanigans in Washington, there’s a lot of strengthening,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Estimates for the last quarter of 2012 are hovering around an unusually weak 1 percent annualized rate.

That dismal pace is driven partly by drags from Europe’s recession and China’s slowdown; partly by companies readjusting after potentially overstocking their back-room shelves in the third quarter; and largely by worries about the so-called fiscal cliff of spending cuts and tax increases set for early 2013.
There are some clear positives for 2013, especially from housing and less drag from state and local governments (Rampell didn't mention this, but I did on Friday). I expect the rate of growth to pickup next year, but I wouldn't get too excited.

Obviously there is going to be some more austerity in the US at the Federal level next year, and we need some reasonable resolution to the "fiscal cliff". My expectation is that relief from the Alternative Minimum Tax (AMT) will be extended, the tax cuts for low to middle income families will be extended, and that most, but not all, of the defense spending cuts will be reversed (aka "sequestration"). However I think the payroll tax cut will probably not be extended, and tax rates on high income earners will increase a few percentage points to the Clinton era levels. There are also many more details that will need to be worked out - like Mortgage Debt Relief Act for short sellers, extending emergency unemployment benefits, and the Medicare "Doc Fix".

A few obvious points on the "fiscal cliff": 1) It is about the deficit shrinking too quickly next year, 2) there is no "drop dead" date (the sites with countdown times are embarrassing themselves), and 3) entitlements are not part of the "cliff" (although some changes might be part of an agreement).