Why the Economy Won't Blast Off Anytime Soon

This is not the surging economic recovery we were hoping for.

The good news is that the uncertainty leading up to the year-end fiscal cliff negotiations didn’t seem to hit the labor market hard, as some had feared. The bad news is an economic surge in 2013 appears out of reach, at least for now. Friday's jobs report suggests that lackluster job growth is the likely story for the next few months. Payrolls rose by 155,000 and the unemployment rate was unchanged at 7.8 percent in December, the Labor Department reported on Friday morning. The numbers were smack in line with expectations.

“This may well count as the most boring payrolls report ever. The recovery is proceeding at pretty much the pace we all thought it was,” University of Michigan economist Justin Wolfers wrote on Twitter.

Federal Reserve Chairman Ben Bernanke held out hope last year that when lawmakers resolved the country’s fiscal issues, they would set the stage for economic takeoff in 2013.

“Cooperation and creativity to deliver fiscal clarity — in particular, a plan for resolving the nation's longer-term budgetary issues without harming the recovery — could help make the New Year a very good one for the American economy,” he said in a New York speech in November. The Fed chief added that he had a sense there was a lot of unused capability “waiting to see how things will evolve.”

The thirteenth-hour deal lawmakers reached on New Year’s Day to avoid the full impact of the fiscal cliff, however, didn’t solve the nation’s longer-term budgetary issues. It didn’t even solve the immediate-term issues. Instead, it teed up two new fights in the coming months over raising the nation’s borrowing limit and tackling automatic spending cuts set to kick in on March 1. Immediately on the heels of those issues, Congress will have to pass new legislation to fund the government. 

There goes the liftoff scenario.

“We had hoped that a comprehensive agreement would prompt a wave of spending by households and businesses who are currently sitting on the sidelines due to uncertainty about fiscal policy. Instead, we have another potentially very disruptive budget battle coming soon, so any upside risk to our forecast from pent-up demand may now have gone, for a few more quarters at least,” Paul Ashworth, chief U.S. economist at research firm Capital Economics wrote in a recent research note.

“I wouldn’t expect to see that much of a pickup, particularly not now. We’re going straight into another budget fight and one that could end in a partial government shutdown. I honestly think we’ll just get more of the same this year,” he added in a separate interview on Friday.

It’s frustrating because experts saw the potential for such liftoff. This fall, former deputy Treasury Secretary Roger Altman argued in a Financial Times editorial that the U.S. economy had the potential to “surprise on the upside.” 

“The famine could be followed by a feast,”  he wrote, seeing the possibility for a growth spurt in the next five years akin to the one the economy experienced in the latter half of the 1990s. Then, growth exceeded 4 percent for years.

Altman gave five reasons growth could take off. Now that we've been through the cliff negotiations, the final point is depressing: “If Barack Obama is reelected, he may allow the George W. Bush tax cuts to expire at the end of 2012. That step could force Congress to the negotiating table and produce a large, balanced deficit-reduction programme that would boost confidence, the stock market and private investment,” Altman wrote. 

Instead, the opposite appears the more likely course for now. There’s still no large, balanced deficit-reduction program in sight. The next budget battles could depress business confidence and hit hiring and spending, Deutsche Bank analysts recently warned. “Growth prospects would be significantly better if fiscal policy were on the right track,” they said.

That’s why the great, pre-fiscal cliff hope put forth by Bernanke and others that resolution of the nation's fiscal issues could set up a banner year for economic growth still appears out of reach.

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