Forecast improves for late ‘13 economy

WASHINGTON – May 13, 2013 – Political paralysis in Washington won’t stall an economic recovery that’s revving up across the rest of the country. That’s the consensus of economists surveyed by USA Today, who predict the recovery will accelerate late this year even without a deal by Congress and the White House to lessen the impact of automatic federal budget cuts.

The across-the-board spending cuts will cause growth to slow in the middle of 2013. But the negative effects will ease by the fourth quarter as the private sector gathers strength, according to the 43 leading economists surveyed May 6-9.

This year, the budget cuts are expected to pare federal spending by $65 billion and shave half a percentage point off economic growth, according to the Congressional Budget Office (CBO) and Moody’s Analytics.

The economy expanded at a 2.5 percent annual rate in the first quarter. Economists’ median estimates project growth is likely to average about 2 percent annually this quarter and next.

Monthly job growth, which averaged 206,000 in the first quarter, will average 165,000 in the second quarter and 172,000 in the third quarter, the economists say.

Many top economists, including Federal Reserve Chairman Ben Bernanke, have urged delaying much of the belt-tightening until the economy is on more solid footing. While the White House and a divided Congress are making little progress in talks, more than two-thirds of the economists surveyed say it’s unlikely even the fiscal 2014 budget cutbacks will be tempered.

An additional $40 billion in cuts next year will reduce 2014 economic growth by 0.3 percentage points, the CBO and Moody’s say. Even so, the economists expect growth to pick up in the fourth quarter and approach 3 percent by early next year as job gains climb to a 200,000 monthly average.

Since the job market hit bottom in early 2010, the economy has grown about 2 percent annually and monthly job growth has averaged 162,000.

“There are some powerful positive forces to offset” budget cuts, says Jim O’Sullivan, chief U.S. economist of High Frequency Economics.

The Fed’s bond-buying initiative, he says, has held down long-term interest rates, juicing housing and driving up stock markets.

Housing starts are likely to total 990,000 this year and about 1.2 million in 2014, according to Standard & Poor’s, up from 780,000 in 2012.

O’Sullivan says higher home and stock prices are making consumers feel wealthier, so they’ll spend more. Continued job gains, he says, will further bolster spending.

Wells Fargo economist Mark Vitner says the stock market rally has mostly benefited the wealthy while wage gains for average Americans have languished: “We’re getting a recovery. It’s just a slow recovery.”

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