By: Ben White
October 25, 2013 05:01 AM EDT
The latest round of fiscal drama has sputtered to a temporary close, but the routine crises have one clear victim: the U.S. economy, which is once again losing altitude. And for the third year in a row, Washington gets much of the blame.
There’s not much hope for a quick turnaround.
The most recent slowdown — highlighted by poor job growth, softening corporate earnings and decimated confidence — comes just as Republicans and Democrats prepare to square off in a fresh fight over the federal budget with another potential shutdown looming in January and a renewed debt ceiling crisis possible in February.
Washington’s drag on the economy now springs from a multiplying array of sources, including the constant threat of devastating fiscal crisis, the blunt nature of the sequester spending cuts, the troubled roll-out of Obamacare and the now deeply strained relations with key economic allies over clandestine surveillance allegations.
Taken together, Washington’s toxic politics and poorly executed policies have all but ensured that fourth quarter growth comes in soft after forecasters initially predicted a strong close to the year. And they mean that 2014, which initially looked like a possible breakout year for the U.S. economy, now seems like it will be a dreary rerun of 2013 featuring sluggish growth, modest job creation and stagnant wages.
“The fourth quarter is now going to be much weaker than I expected,” said Beth Ann Bovino, chief U.S. economist at Standard & Poor’s. “And now all these fiscal deadlines are pushed into January and February and that’s going to weigh on 2014. I don’t think we breach the debt ceiling next year, but it’s hard to see any long-term resolution given the very toxic environment on Capitol Hill.”
Bovino and other economists noted that while many GOP party leaders viewed the shutdown and debt limit fights over President Barack Obama’s health care law as political losers, there is no guarantee that tea party conservatives in the House will make fiscal deals any easier next year. House and Senate budget negotiators are supposed to come up with an agreement on 2014 spending levels by mid-December with very few legislative days to get there and no consensus in sight.
Another fiscal brawl would follow evidence that the economy was flagging even before the October shutdown.
The September employment report showed a gain of just 148,000 jobs. The three-month average, a more accurate picture of the economy, dipped to 143,000, well below the 182,000 average for April through June. Gross domestic product growth accelerated from 1.1 percent to 2.5 percent in the second quarter, but that increasingly looks like the high point for the year.
Not all of this is attributable to Washington. But a good bit of it is.
The Congressional Budget Office estimates that the swift deficit reduction created by the sequester spending cuts enacted following the “fiscal cliff” fight will reduce economic growth by 1.5 percent in 2013. Even many staunch conservatives who consider long-term deficit and debt reduction a top priority acknowledge that the blunt across the board cuts in short-term discretionary spending are far less appealing from an economic policy perspective than longer-term entitlement changes.
Cutting deficits too far too fast slammed growth across the eurozone and appears to be doing exactly the same in the U.S.
House Appropriations Committee Chairman Hal Rogers (R-Ky.) said earlier this year that “sequestration — and its unrealistic and ill-conceived discretionary cuts — must be brought to an end.” Even Sen. Ted Cruz (R-Texas), architect of the shutdown strategy over Obamacare, has said in recent speeches that the GOP should focus less on austerity, which means budget cuts, and more on growth, which generally means tax cuts.
And both House Budget Committee Chair Paul Ryan (R-Wisc.) and Senate Budget Committee Chair Patty Murray (D-Wash.) have indicated a desire to replace the sequester with more finely tuned spending cuts.
But getting there will be a huge challenge, especially with many in Republican leadership moving off Obamacare as their top target — believing it will collapse of its own weight — and instead drawing a hard line on protecting every penny of the $1.1 trillion in sequester cuts.
Senate Minority Leader Mitch McConnell (R-Ky.) recently told POLITICO that keeping discretionary spending at $967 billion in 2014, well below what Democrats want, is the GOP’s top goal. That means the so-called “fiscal drag” will almost certainly continue into 2014.
And while jobs numbers do not necessarily suggest that the now-delayed employer mandate under Obamacare is creating more part-time and fewer full-time positions, anecdotal reports do suggest some businesses are reluctant to add full-time workers or expand beyond the 50-employee threshold to avoid having to provide health care to workers under the new law.
Obamacare’s well-documented early struggles can only add to a growing sense on the part of the public that the executive branch and Congress are both only barely functional.
U.S. economic confidence, according to Gallup, fell to a reading of -39 during the recent government shutdown, an event likely to shave half a point off fourth quarter economic growth. That reading was the lowest since November of 2011 during that last big debt limit fight.
And the problems now stretch overseas.
The White House this week had to address reports that the U.S. monitored the cell phone of German Chancellor Angela Merkel. The administration said the U.S. is not and will not monitor Merkel’s cell phone but avoided saying such eavesdropping has never occurred. Germany is the most powerful economy in the eurozone and the U.S. regularly leans on the nation not to force too much austerity on its weaker southern European neighbors.
The reports of espionage in Germany followed complaints from the heads of state of Brazil and France about U.S. foreign surveillance. They also followed Edward Snowden’s revelations of National Security Agency tactics.
All of it has undermined the U.S.’s standing in the world.
“The U.S. is taking a big hit to its foreign policy and its standing internationally,” said Ian Bremmer, founder and president of Eurasia Group, a political risk analysis firm. “There are trade deals now that may not move forward, and that is a very big deal longer-term.”
None of this suggests the U.S. economy will slip back into recession next year unless the U.S. actually fails to raise the debt ceiling in February and defaults, an event very few believe will ever occur. The technology and energy sectors continue to be sources of strong and sustainable growth and the housing market continues to rise.
Stock prices also continue to hit new highs. But that is at least in part because the Federal Reserve keeps pumping money into the financial system by buying bonds, making riskier assets like stocks more attractive. It is not clear if current stock market valuations will be sustainable when the Fed finally stops bailing out Washington’s political failures.
Analysts and executives say the issue is not so much that Washington is killing all growth, it’s that it is standing in the way of what could be a far stronger economy. And the problems stem as much from what is not happening as what is, according to top business leaders who continue to advocate for action on immigration and corporate tax reform, both of which could wind up boosting U.S. economic growth.
Officials from the Chamber of Commerce and National Association of Manufacturers were at the White House Thursday to push for immigration reform. But many Hill watchers believe the chances of immigration or tax reform making it through Congress this year are near zero. And they are even less is likely to happen during the 2014 midterm election year.
That leaves executives despairing about the prospects for faster growth.
“It boils down to Washington but there are a lot of different levers. The thing that we need more than anything is we need some economic growth. We need CEO and boardroom sentiment to change two degrees. We don’t need to it change 90 degrees,” said Gary Cohn, president and chief operating officer at Goldman Sachs. “We need to go from pure paranoia to just scared. Just scared would be a big improvement.”