Quantcast
Connect with us

Analysis: Budget-cutting could cripple recovery

Published

on

NEW YORK (Reuters) – Two years removed from its worst recession since World War Two, the U.S. economy is still struggling to create jobs, and things could get even tougher if all the talk of belt-tightening in Washington becomes reality.

Data on Friday showed hiring ground to a near halt last month, driving the jobless rate up to 9.2 percent and casting doubt on whether a sluggish U.S. recovery would soon pick up steam.

This all but ensures the Federal Reserve will keep interest rates at record lows well into 2012. But help probably won’t be as forthcoming from Congress and the White House, which are locked in battle over cutting a $1.4 trillion budget deficit.

The problem is one of timing: Economists and investors fear that with weak labor and housing markets causing consumers to tighten their own belts, the last thing the economy needs is an aggressive dose of austerity from the federal government.

“The U.S. government has its work cut out for it,” said Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut. “U.S. fiscal problems have been put off for so long that the government has to cut spending at a time when the economy is unable to absorb it.”

ADVERTISEMENT

As a share of output, the $1.4 trillion budget gap expected for the fiscal year ending in September is one of the largest since World War Two.

President Barack Obama and Republican leaders are aiming for savings of $2 trillion to $4 trillion over 10 years but are at odds over the right mix of spending cuts and tax hikes.

A deal is needed by August 2 in order to lift the $14.3 trillion cap on government borrowing.

ADVERTISEMENT

While that’s not an astronomical amount for a $14 trillion economy, it still amounts to tighter policy at a time that many economists say requires even more aggressive federal spending.

Much depends on the size, scope and timing of spending cuts. If they are large enough and take effect next year, they will depress corporate earnings and weigh on equity markets, according to Credit Suisse U.S. equity strategist Doug Cliggott.

Solid corporate earnings and loose monetary and fiscal policies have helped the S&P 500 index double in value since early 2009.

ADVERTISEMENT

“We really are in a bind here,” Cliggott said, “We have to start addressing the deficit, and if it means a rough stretch for corporate profits and the equity market, then they go through a rough stretch. Putting it off is not the answer.”

WALKING THE TIGHTROPE

Fed Chairman Ben Bernanke and others have urged lawmakers to reduce the deficit but to back-load the most draconian spending cuts or tax hikes to shield the fragile economy.

ADVERTISEMENT

“The idea seems to be that reducing the deficit will somehow produce jobs,” said Kathy Jones, fixed income strategist at Charles Schwab. “I’m not sure there’s a direct correlation there. We need to allow growth now, because stronger growth will help the long-term fiscal outlook.”

That’s clear in Europe. Facing default, Greece’s parliament last week adopted a package of large and unpopular spending cuts and tax hikes in exchange for international aid.

But economists and investors fear the austerity will make it difficult for the country to grow its way back to health.

ADVERTISEMENT

Britain, too, has been more aggressive than the United States in cutting spending and raising taxes, and the pace of growth slowed to 1.6 percent in the 12 months to March. Markets are even starting to bet the central bank may have to act by pumping more money into the economy.

David Semmens, U.S. economist at Standard Chartered, said the 2012 election may clip even the biggest deficit hawks’ wings, as lawmakers won’t want to lose votes. A rising jobless rate is an impediment for Obama’s reelection chances.

“I think any spending cuts will be aimed at 2013,” he said.

ADVERTISEMENT

But history does suggest a commitment to fiscal probity is required for long-term economic health. Cliggott said countries with debt-to-output ratios above 90 percent have traditionally grown at slower rates than those with stronger finances.

“It shows the tightrope that has to be walked,” said Greg McBride, senior financial analyst at Bankrate.com. “We’ve got to rein in the government red ink so we don’t in coming years face a day of reckoning. But it’s a balancing act, because if you rein it in too much, it will plunge us into recession.”

(Editing by Leslie Adler)

ADVERTISEMENT

Source: Reuters US Online Report Top News


Report typos and corrections to [email protected].

Send confidential news tips to [email protected].
READ COMMENTS - JOIN THE DISCUSSION
Continue Reading

2020 Election

White House aides fear Trump believes House vote against impeachment means it’s never going to happen: report

Published

on

A proposal to start impeachment hearings that failed in the House on Wednesday led Donald Trump to optimistically proclaim that his presidency is safe at his North Carolina rally last night. But his proclamation has some White House officials worried the president really believes he is out of the woods.

According to a report at Politico, close aides to the president worry that his comment that "we have all this [impeachment] behind us," may be based on an unfounded notion by Trump about how Congress works.

Speaking at his campaign rally in Greenville, N.C., Trump boasted to the crowd, "I just heard that the United States House of Representatives has overwhelmingly voted to kill the most ridiculous project I’ve ever been involved in: the resolution -- how stupid is that -- on impeachment. I want to thank those Democrats because many of them voted for us, the vote was a totally lopsided 332-95-1.”

Continue Reading

Breaking Banner

Trump campaign refuses to disavow crowd’s racist ‘send her back’ chants

Published

on

NPR reporter Tamara Keith on Thursday asked the Trump campaign if it wanted to disavow the racist "send her back" chant directed at Rep. Ilhan Omar (D-MN) during a Wednesday night Trump campaign rally.

In response to Keith's question, Trump 2020 communications director Tim Murtaugh not only refused to disavow the chants, but then took the opportunity to attack the entire Democratic Party for being aligned with "socialism."

"The Squad, as they call themselves, are now the leaders of the Democrat Party," he replied. "Americans don’t like it when elected officials consistently disparage this country. All the Democrats are pushing socialist ideas that are terrible for America. They are all the same."

Continue Reading
 

Breaking Banner

‘Keep praying!’ Hope Hicks texted Michael Cohen to ask God to make the porn star payoff scandal go away

Published

on

According to text messages revealed in the unredacted search warrants in Michael Cohen's campaign finance case, he and Hope Hicks not only talked on the phone multiple times, but they were also texting.

After the "Access Hollywood" tape dropped, Hicks, Trump and Cohen exchanged multiple phone calls. Cohen even called Kellyanne Conway at a time that she was serving as the Trump campaign manager to discuss a recording of Stormy Daniels sent from her attorney denying the affair after she was paid.

Continue Reading
 
 
 

Copyright © 2019 Raw Story Media, Inc. PO Box 21050, Washington, D.C. 20009 | Masthead | Privacy Policy | For corrections or concerns, please email [email protected]

Join Me. Try Raw Story Investigates for $1. Invest in Journalism. Escape Ads.
close-image