US economic backsliding temporary? Maybe not if 'sequester' hits.
A dip in GDP during the fourth quarter of 2012 stemmed largely from a dive in federal defense spending. Some economists see a cautionary lesson for upcoming sequester talks in Congress.
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Some economists say the economy, weak as it remains, could withstand the spending cuts contained in the sequester without entering recession. But they generally agree that the cuts, designed to total about $100 billion a year, would represent a substantial blow.
Jan Hatzius, Goldman’s chief economist, says that if the sequester takes effect, it would be harder for the economy to accelerate later this year, “and we would probably reduce our GDP numbers” for the year’s final three quarters to about 1.5 percent annualized growth, or a bit worse.
That would be a very disappointing growth rate, raising the prospect of continuing high unemployment. But if that forecast is correct, the US would avoid recession.
This week’s GDP surprise (economists hadn’t been expecting growth to turn negative) prompted both Republicans and Democrats to lament policy failures in Washington.
Where many Democrats warn that a Republican focus on spending cuts could choke the economy, Republicans generally say that a show of long-term budget discipline could help invigorate private-sector confidence and job creation.
Both those views may have important grains of truth.
The latest GDP news shows that with a growing private sector, the economy can handle a certain amount of fiscal restraint or austerity, but not an unlimited amount without causing a recession.
At the same time, economists generally say the need for fiscal discipline in the medium and longer term is real – and that the economy could be helped right now by putting changes in place.
Mr. Dhawan says the big need is for entitlement reform, more than for cuts in other government operations such as defense or scientific research. The question is whether the economic risks – apparent in the GDP headlines – will hold bargainers’ feet to the fire, resulting in a prudent fiscal plan.
“If that happens, to me 2014 looks very good,” and 2013 would look recession-free, he says.