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Sequestration, Politics—and the Economy

12:00 AM, Feb 2, 2013 • By IRWIN M. STELZER
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Throw in three other factors that minimize the importance of the 0.1 percent fourth-quarter decline. The reduction in government spending in late 2012 is not altogether a bad thing: if sustained, it might bring the deficit down. Second, the drop in inventories means more stuff moved off the shelves than was added to stocks, setting the stage for re-stocking in the next quarter. Finally, the Federal Reserve Board’s monetary policy committee notes that “weather-related disruptions and other transitory factors” added to the downward tug in the first quarter. So there is little reason to treat the 0.1 percent first-quarter downtick as a harbinger of hard times to come, and more reason to give weight to the growth in the consumer, business, and housing sectors, not to mention the demographic, energy, and insourcing trends detailed by Sharmin Mossavar-Rahmani of Goldman Sachs’s investment strategy group in “Over the Horizon.”

Still, it would be prudent to keep the champagne on ice, unopened.

·     The 157,000 jobs created last month in an improving labor market nevertheless were too few to prevent a modest uptick in the unemployment rate from 7.8 percent to 7.9 percent, or to provide work for the more than 12 million unemployed workers.

·     The 2.6 percent gain in personal income in December was inflated by bringing forward into 2012 dividends originally scheduled to be paid in 2013, in order to beat the dividend-tax increase.

·     Sequester cuts in spending might knock some 0.7 percent off of GDP growth this year.

Then there are things we don’t yet know:

·     The impact of the January 1 increase in payroll taxes: the average family has been hit with a $20-per-week cut in take-home pay.

·     Whether “the wealthy,” faced with increases in tax rates on their incomes and capital gains, an Obamacare tax on their investment income, and whatever other bad news the Obama administration has in store for them, will rein in spending.

·     Whether small businesses faced with substantial Obamacare penalties if they have more than 50 workers will continue to hold off on hiring and investment.

Add to these known unknowns the unknown unknowns, political and economic, and it would be foolish to claim a clear crystal ball. Still, this economist can’t help feeling that the U.S. economy will grow at a faster rate than the 1.5 percent consensus forecast. In part this is mere intuition, based on a feel for what I see in the malls, and hear from real estate developers and people whose lives are not Washington-centric. In part, too, it is based on early data for this first month of the new year. Auto sales by both GM and Chrysler jumped 16 percent in January. The Institute of Supply Management (ISM) manufacturing index rose last month, with new orders, production and employment all showing significant increases. The University of Michigan preliminary consumer sentiment index for January has been revised upward, reflecting an improvement in consumers’ expectations about the future. Private construction expenditures seem on track to continue recent increases. Builders are complaining about a shortage of skilled construction labor, as are oil and gas exploration companies. The city of Detroit is making a comeback of sorts based on higher payrolls in the auto industry and profit-sharing bonuses the auto companies are paying out to their workers. Straws in the wind only, but worth noting.

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