Prospect of more battles over budget unnerves economists

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The political shootout during this summer’s debt standoff ended up wounding the economy, and the threat of more missteps as Congress and the White House resume their budget battles next week looms as one of the biggest risks for an economy already perilously close to recession, economists warn.

Washington’s poor handling of the debt crisis caused the first-ever downgrade of the nation’s top credit rating and contributed to the worst turmoil in financial markets and biggest drop in consumer confidence since the 2008 financial crisis and recession. The developments continue to reverberate and cast a cloud over the economy.

While consumers and investors were shaken to the core, economists suspect businesses responded in kind, postponing plans for hiring and investment during the month and dimming the already weak outlook for growth and jobs. A report Friday is expected to show as few as 25,000 jobs created last month as employers — like others — stepped back and watched aghast at the unfolding train wreck in Washington.

With the recovery now hanging in the balance, even independent analysts who usually avoid commenting on politics are speaking out about the dangers of further gamesmanship and gridlock for the economy.

“The potential for more bitter and damaging political standoffs is high,” and the “massive uncertainty” clouds the future for the markets and economy, said Nariman Behravesh, chief economist at IHS Global Insight. He said the economy is barely “staggering forward” in the wake of these self-inflicted wounds.

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Federal Reserve Chairman Ben S. Bernanke said last week that "The country would be well-served by a better process for making fiscal decisions."

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ASSOCIATED PRESS Federal Reserve Chairman Ben S. Bernanke said last week that ... more >

“The single-biggest risk facing both the United States and Europe is a policy mistake” that would take away stimulus that is helping to hold up growth, he said, noting that the budget impasse is threatening to prevent the extension of payroll tax cuts and other stimulus measures enacted at the end of last year.

Those measures are adding about 1 percentage point to economic growth this year — no small contribution when growth is running at less than 1 percent, he said.

Federal Reserve Chairman Ben S. Bernanke also warned last week that political machinations that led to the downgrade last month hurt the economy.

“The negotiations that took place over the summer disrupted financial markets and probably the economy as well,” Mr. Bernanke said in a speech in Jackson Hole, Wyo. “The country would be well-served by a better process for making fiscal decisions.”

Many economists view Mr. Bernanke’s warning as understated, given the evidence of economic damage that is piling up by the day.

“The drama around the lifting of the U.S. debt ceiling has weighed down on financial markets and eroded business and consumer confidence,” said Joachim Fels, an economist at Morgan Stanley. Confidence in government in particular has collapsed to record lows, according to surveys.

“A negative feedback loop between weak growth and soggy asset markets now appears to be in the making” at a time when the economy is “dangerously close to recession,” Mr. Fels said. “This should be aggravated by the prospects of fiscal tightening” as the stimulus ends later this year and budget cuts take hold.

The precipitous fall in consumer confidence in the past month was widely attributed to the unsettling budget struggle and is particularly foreboding for the economy, since consumer spending normally fuels about 70 percent of economic activity and was already weak for much of the year.

Thursday’s preliminary reports on retail sales during August suggested that consumers did not pull back as much on spending as feared despite the massive loss of confidence, which was focused on the political system rather than personal finances.

The University of Michigan, which has been tracking consumer sentiment for decades, noted an unprecedented “sense of despair and pessimism about the role of government” in its survey for August, while the Conference Board also attributed a dramatic drop in its confidence measure to political factors and the stock market rather than the usual worries about jobs.

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