Want an easy explanation for why the economy and hiring have slowed again? Try this: High gas prices have erased the stimulative effects of the tax-cut deal President Obama and Republicans cut at the end of 2010.
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That’s the view from researchers at Morgan Stanley, who along with a lot of other Wall Street analysts, have cut their forecasts for 2011 growth substantially in the last few weeks. The predictions now sound a lot like what analysts were saying late last year, before Obama and the GOP agreed to a package of temporary tax cuts including an extension of Bush-era rates.
Morgan Stanley economists wrote Friday that their latest revision, from 3.6 percent growth down to 3.3 percent growth for the year, “puts us back to where we were in early December—before policymakers enacted a package of tax cuts aimed at stimulating the economy.
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“The logic behind this round trip in the forecast is fairly straightforward,” they wrote, adding: “The move in gasoline [prices] just about fully offsets the impact of the payroll tax reduction” that was the largest stimulative piece of the tax-cut deal.
Other analysts made similar revisions this week. Deutsche Bank cut its 2011 outlook from 3.4 percent to 3.1 percent. IHS Global Insight cut from 2.7 percent to 2.5 percent. They all cite the effects of high gas prices, born of Middle East unrest, which have diverted consumers’ dollars and rippled through the economy.
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“The problem is not that consumers are not spending money; the problem is that their purchasing power has been sapped by the surge in prices earlier this year, particularly for gasoline,” analysts for Barclay’s Capital wrote on Friday. “In our view, the slowing in real consumer spending has been a main cause of the drop-off in the growth rate of manufacturing production.”
Before the tax deal went through, economists largely projected gross domestic product would grow at around 3 percent in 2011, enough to only slowly chip away at the unemployment rate. But after the agreement, most forecasts improved by a half or full percentage point, largely thanks to the expected consumer spending boost from a 2 percentage-point cut in payroll taxes that was included in the package.
As Morgan Stanley estimates it, the payroll cut was worth about $100 billion in stimulus. A rise of $1/gallon in gas prices—such as the jump from $3 to $4 that followed the beginning of “Arab Spring” this year—saps about $120 billion in consumer spending growth, those analysts say.
Consumers have dipped a bit into savings, but not a lot. So not surprisingly, job growth this month fell back to a net gain of 54,000, the lowest level since the deal passed.
In fact, it’s mildly surprising that things don’t look worse now than they did in December, because natural disasters and government job-shedding have added to the grim gasoline news.
The good news is, gas prices appear to be in steady retreat. That’s why nearly all analysts expect a ramp-up in growth in the back half of this year—and maybe, finally, some sustained, major expansion and job creation in 2012.