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Economy hums along, proves taxing and spending prognosticators wrong
Political and economic pundits are not the only ones impressed with the economy’s resilience in the face of austerity policies. The Fed, which launched a major easing program last year partly in anticipation of the much-feared “fiscal cliff” of tax increases and spending cuts, in recent weeks has signaled that it no longer is so worried about the U.S. recovery and plans to start phasing out its easing programs.
Although Mr. Bernanke continues to advise Congress to focus more of its budget cuts on longer-term spending problems such as the fast-growing Medicare and Medicaid entitlement programs, he has been less strident in his most recent appearances before lawmakers about the danger of premature budget cuts for the economy. One reason Fed officials may be less concerned about the impact on growth is that many expect the government to revise economic growth figures significantly upward when the latest numbers are released Wednesday.
“There is ample evidence that the economy was growing faster than official statistics showed,” said Karl Smith, economics professor at the University of North Carolina at Chapel Hill. For example, he noted a key breakthrough this year when Fannie Mae and Freddie Mac achieved profitability after five years of government conservatorship and a deep housing recession, enabling them to provide the Treasury with a one-time cash dividend of $87 billion that partially repays some of the $190 billion they received in a taxpayer-financed federal bailout in 2008.
The revenue windfall from Fannie and Freddie, which was part of the reason for the big reduction in federal spending and deficit estimates this spring, also provided a powerful clue about the underlying strength of the economy, Mr. Smith said. The strong rebound in the housing market has sent home prices surging and made lending more profitable, while curbing losses from defaults on underwater mortgages backed by the two mortgage financing giants.
Joseph G. Carson, an economist at AllianceBernstein, said the economy’s strength is likely to be further revealed Wednesday when the government releases revisions of its gross domestic product report that are likely to increase estimates of growth since 2009 above the sluggish 2 percent average reported thus far.
For one thing, the report will push up estimates of growth in one fell swoop by reclassifying a large category of business spending on research and development as investment spending that contributes to growth, rather than an expense that subtracts from corporate income and profits.
But growth may be revised upward for other reasons as well, Mr. Carson said.
Tepid growth estimates have not jibed with more positive unemployment reports showing a steep drop in the national jobless rate from a high of 10 percent in 2009 to the current 7.6 percent, or with evidence of surging tax revenues, which have grown between 8 percent and 9 percent in the past year.
The strong tax revenue gains come on top of evidence that incomes are growing at a strong 5 percent annual pace, he said, and the combination suggests that the economy has more underlying strength than previously reported.
“In the past, gains of this magnitude in tax receipts have been consistent with annualized growth of at least 5 percent,” he said.
Not all economists are as optimistic about growth. IHS Chief Economist Nariman Behravesh said he expects the first quarter’s large dose of austerity to have a belated negative impact this year, holding down growth to between 1.5 percent and 2 percent in the second quarter and for the remainder of the year before it gradually accelerates into the 3 percent range next year.
The Congressional Budget Office also continues to forecast that the automatic spending cuts will reduce growth by about a half-percentage point and cost the economy about 700,000 jobs.
“Unfortunately, there is a substantial fiscal drag that will continue through year-end,” Mr. Behravesh said.
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About the Author
- China and other heavy polluters contribute little to restitution fund for emerging markets
- U.S. unemployment falls to five-year low of 7 percent; 203K jobs added
- Economic growth jumped to 3.6 percent in summer
- Spending on social welfare rose as economy tanked during recession
- Treasury aims to sell off GM stock by end of year
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