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Debt ceiling: With debate on hold, where is US economy headed now?

With the debt ceiling's threat no longer imminent, the US economy appears to be stuck in neutral, waiting to be pushed forward or back. Here are head winds and tail winds competing for influence.

By Ron SchererStaff writer / January 24, 2013

The US flag flies next to the Capitol building in Washington. Congress and the Obama administration appear poised to halt their haggling over raising the national debt ceiling, at least for a few months.

Alex Brandon/AP/File

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New York

Like a sailboat caught in the doldrums, the US economy in 2013 is looking for a puff of wind to get it moving again.

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Seemingly every bit of positive economic news is offset by some that is negative:

Tax rates for most everyone who works are up, now that the payroll tax cut has expired, but then so is the housing market. Consumer confidence is down, but a leading cause for that dip has expired with the resolution, however much criticized, of the crisis over the "fiscal cliff." Job creation is uninspiring, but corporations are loaded with cash.

While the US economic ship is in calm waters for now, the most visible clouds on the horizon are angry and dark and coming from Washington, in the form of the debate over raising the federal debt ceiling. House Republicans passed a bill Tuesday suspending the debt ceiling for three months to facilitate negotiations over the federal budget, but the measure, which is also expected to pass the Senate, does not bridge the gap on spending issues and may serve only to forestall the battle.

Exactly how perilous is that D.C. drama over the debt ceiling to the nation's economic health? The nerve-racking brinkmanship on the issue in the summer of 2011 was enough to spook Wall Street and lower the US debt rating.

And if the word "recession" isn't on the lips of most economists, some trace a path in that direction if the debt-ceiling issue isn't resolved.

But more on that later. First, let's take a look at why the economy is stuck in neutral, or as John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C., terms it, why "we are entering a slow-motion situation."

How slow? Mr. Silvia estimates the gross domestic product will increase at a 1.4 percent rate in the first quarter before showing some improvement, ending the year growing at a 2.4 percent annual rate. In other words, the economy may not be much different than last year.

Here are some of the head winds and tail winds the 2013 economy is facing:

HEAD WINDS

The debt-ceiling battle

President Obama wants Congress to authorize an increase that will allow the government to pay its bills for several years. Republicans, while temporarily waiving a demand that increases in the debt ceiling be matched dollar-for-dollar with spending cuts, still hope to use the issue as leverage in negotiations over the federal budget.

How damaging could the battle be?

In mid-January, US Treasury Secretary Timothy Geithner, in a letter to Congress, said the government had, since the beginning of the year, been juggling accounts to meet its debt obligations and pay for such things as Social Security checks, veterans' benefits, and money owed to contractors.

"Even a temporary default with a brief interruption in payments that Congress subsequently restores would be terribly damaging," Mr. Geithner warned.

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