It’s as if the economy is trapped on some sort of cosmic hamster wheel. For the fourth year running, the U.S. is experiencing a spring slowdown, with job growth, retail sales, and manufacturing output all falling. The only solace this time around is that economists saw it coming.
The failure of the White House and Congress to avert automatic spending cuts has contributed to the biggest federal-budget tightening in more than 60 years. That’s the big culprit behind the slump—rather than fears of a potential breakup of the euro zone or a hard landing for China’s economy. “There definitely has been a slowdown in the past month,” says Russ Koesterich, global chief investment strategist at BlackRock (BLK), the world’s largest money manager. “I don’t think it’s going to be as dramatic or necessarily as frightening as some of the ones we had back in ’10, ’11, and ’12, which were really exacerbated by a lot of geopolitical issues.”
On April 5, the U.S. Department of Labor reported that employers in March added the fewest workers in nine months, increasing payrolls by just 88,000. That was followed by an April 12 Department of Commerce release showing that retail sales in March registered the biggest drop since June 2012 and a Federal Reserve report on April 16 showing factory output fell 0.1 percent in March. “We saw similar slowdowns in job creation in 2011 and 2012,” Federal Reserve Bank of New York President William Dudley told the Staten Island Chamber of Commerce on April 16. “This, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious.”
Economists have been forecasting for months that growth would take a hit from a combination of tax increases that kicked in at the start of the year and the effect of $85 billion in automatic across-the-board government budget cuts that began on March 1. Initially they expected the brunt of the blow to fall in the first quarter, after payroll taxes were increased by 2 percentage points. Now the expectation is that growth will fall sharply, to an annualized rate of 1.5 percent from April through June, according to a recent Bloomberg survey of 69 economists. The consensus is that growth in the second half of 2013 will average 2.4 percent.
The budget tightening “isn’t a shock,” says Gus Faucher, a senior economist for PNC Financial Services Group (PNC). “Businesses are prepared for it and have taken steps, and government employees know there will be furloughs.” Mark Zandi, chief economist at Moody’s Analytics (MCO), agrees that there has been an improvement in visibility. “It felt scarier a year ago, two years ago,” he says. “The threats we were facing felt more existential and were impossible to handicap,” he added, referring to such scenarios as Greece abandoning the euro and a possible U.S. debt default.
The U.S. economy is better placed to weather the fiscal fallout, says Roberto Perli, a former Fed economist: “The starting point right now is a lot stronger than it was in each of the past three years.” New home construction rose 7 percent in March to a 1.04 million annual rate, the highest level in almost five years, Commerce Department figures showed. Another encouraging data point: Sales of cars and light-duty trucks climbed to an average 15.3 million annualized rate in the first quarter, the highest since the same period in 2008, according to Ward’s Automotive Group.
While the increase in the payroll tax and cuts in government spending are a concern, “everything else seems to be pretty positive,” Kurt McNeil, vice president of U.S. sales and service at General Motors (GM), said on an April 2 conference call. McNeil said gains in employment and housing, a thawing in consumer credit, and the increase in stock prices outweighed the negatives.
Lower energy prices are helping offset some of the pinch on consumers from higher payroll taxes. The share of household income going to pay home energy bills fell to 2.7 percent in 2012, the lowest in 10 years, according to the U.S. Energy Information Administration. The EIA also forecast that consumers will pay an average 6¢ a gallon less for gasoline this summer than a year ago. A gallon of regular, unleaded gas averaged $3.52 on April 23, down 27¢ from this year’s high in February and 33¢ lower than a year ago.
“We’re swooning, and it’s largely because of the tax increases and spending cuts,” says Zandi. As that drag fades going into next year, growth will accelerate to close to 4 percent and “the economy will have finally emerged from the long shadow of the Great Recession.”
The bottom line: While job and manufacturing data show second-quarter growth sputtering, the recovery does not appear to be at risk.
