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Moderate Growth Shrinks to Modest, and Job Growth Slows

12:00 AM, Aug 3, 2013 • By IRWIN M. STELZER
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·     Fifth, while monetary policy has been loose, fiscal policy is tightening as a result of tax increases and cuts in government spending, the former imposed by the Democrats, the latter by Republicans in the House of Representatives. The president, who prefers campaigning to governing, is stumping the country in an effort to whip up support for a “grand bargain.” He is offering to simplify the corporate tax code by eliminating special deals for corporations, such as rapid write-off of capital expenditures, and to cut the tax rate on corporate earnings from 35 percent to 28 percent. Cheers from Republicans. But the net effect is to increase the total tax bill, cash which the president wants to spend on a new stimulus package. Boos from Republicans. They want new revenues used to cut the deficit and reduce taxes on individuals and small businesses, the latter taxed at personal rates rather than the corporate rate.

Looking ahead through the fog created by data revisions and the difficulty of predicting where four-party negotiations over taxes and spending between the president, his left, the Republican leadership in the House, and their right, will come out, some things seem relatively clear. The housing sector should continue to move ahead, despite a recent one-percentage point rise in mortgage-interest rates. As builders increase supply to eliminate inventory shortages that produce panic-buying, price increases might ease from the 6 percent rate they jumped in June, the largest increase since 2006. But there is little prospect of another housing bust.

Auto sales, now near post-crisis highs, should also continue to top 15 million vehicles per year. The existing fleet is still rather old, consumers have postponed replacing their cars until they could be certain that they would not join the ranks of the unemployed, and construction workers are snapping up small trucks to carry them and their tools to construction sites. GM reports a 44 percent pop in July sales of pickup trucks.

The outlook for the manufacturing sector is also looking up. New orders and production rose last month, and employment in factories expanded at its fastest pace in thirteen months. Inventories fell, which bodes well for future activity. It is not clear that we are having the much-touted “Manufacturing Renaissance,” but we are seeing an improvement in the manufacturing sector.

If Republicans don’t cut spending still more, Democrats don’t raise taxes, and Bernanke successfully begins a slowdown in his printing presses, the rest of the year might surprise on the upside, to borrow a phrase from Wall Street analysts. 

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