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January jobs report: Will 'OK' jobs market make politicians complacent?

Employers added 157,000 jobs in January, but the unemployment rate rose to 7.9 percent. Now, in a few weeks, sizable federal spending cuts could put an added damper on economic activity.

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But Robert Dye, chief economist at the banking firm Comerica, warns that many fiscal issues are still outstanding, with Congress seeking a difficult balance between sustaining growth and putting the federal budget on sounder footing by reducing future deficits.

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“Right now it is reasonable to assume that a significant portion of the $110 billion sequester will happen,” he wrote in an analysis published in January by Blue Chip Economic Indicators. “It is reasonable to assume that the total fiscal drag from increased taxes and reduced spending will be in the neighborhood of 2 percent of GDP, primarily felt in the first half of 2013.”

The result, Mr. Dye says, could be an economy that grows very little (perhaps at a 1 percent pace) or not at all for the first half of the year. That would leave the economy much more vulnerable than usual to the risk of recession.

If more optimistic economists are correct, the outlook may be brighter. In the Blue Chip survey of more than 50 forecasters, some see the economy growing at a pace higher than 2 percent in the first quarter, rising to 3 percent later in the year.

That outlook banks on a continuing steady rise in activity within the private sector (which accounts for about 84 percent of all jobs) outweighing the braking effects of tighter fiscal policy.

Moreover, some economic analysts argue that the sequester, cutting federal spending by about $100 billion a year, doesn’t pose a risk to the job market. The conservative editorial board at The Wall Street Journal, for example, opined Thursday that the spending cuts “will help business and investor confidence by finally showing that government can restrain itself – at least a little and however crudely.”

Many Republican lawmakers appear ready to allow the spending cuts to go forward, in part based on similar reasoning that the economy would benefit more from government restraint.

Even some conservative economists, however, warn that spending cuts could hurt GDP in the short run. “Congress and the president need to avoid excessive austerity with respect to changes in fiscal policy this year,” John Makin of the American Enterprise Institute argued in a recent report.

The sequester could result in job cuts on both federal and private-sector payrolls, as the government would cut back on procurement from defense contractors such as Lockheed Martin.

That doesn’t mean long-run deficits should be ignored. Mr. Makin and many other economists argue for taking steps now to reform entitlement programs, in a bid to head off a dangerous rise in national debt.

All this leaves policymakers with a bit of a tightrope to walk.

If Congress does too little to address the debt risk, and there is too much partisan gridlock, credit rating agencies could downgrade the quality of US Treasury debt. But the 2013 spending cuts, if they happen, could dampen job growth that's not exactly robust.


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