Political indecision weighs on economic forecasts

[July 18, 2013]  WASHINGTON (AP) -- Politicians and economists are straining to get a clearer view of what the economy will look like a year from now, when midterm political campaigns are heating up. Republicans see the glass as half-empty; Democrats view it as half-full. And the economists aren't sure.

"Our economy is recovering at the slowest rate since World War II," House Speaker John Boehner, R-Ohio, lamented to a group of manufacturers. "Quarter after quarter, the growth numbers barely move, unemployment stays about the same."

Democrats beg to differ. "There are a lot of reasons for us to feel optimistic about where we're headed as a country," President Barack Obama tells audiences, citing steady jobs gains, a falling deficit and a more stable housing market.

Which is it? Economic forecasters are torn.

And their forecasts are suddenly all over the map. Some see U.S. growth stuck below 2 percent for some time, while others -- among them the Federal Reserve and the White House -- predict it will climb above 3 percent as soon as next year .

While the economy clearly is on the mend, the different forecasts stem from the fact that the recovery's pace is uneven, economic growth remains anemic and the unemployment rate is still stubbornly high a full four years after the deep 2008-09 recession officially ended. Feeding the uncertainty is confusion over just when the Federal Reserve will start turning off the easy-money faucet and the sharp partisan divides on Capitol Hill over spending cuts, raising the U.S. debt ceiling and funding the government for the fiscal year that begins Oct. 1.

Assumptions about yet to-be-made decisions by Washington policy-makers can have an enormous impact on forecasts.

"Forecasting these days is difficult. There are a lot of imponderables out there," said Nariman Behravesh, chief economist for IHS Global Insight. "The best we can do as forecasters is to make some educated guesses." He's telling clients that right now economic growth is likely to remain between 1.5 and 2 percent through September. "Employment growth will be OK but not great."

But a lot depends on Congress. "And the politics are such that the closer we get to the midterm elections, it's more likely it is that nothing is going to be done," he said.

It's not a new predicament. An exasperated President Harry Truman once famously pleaded for a one-armed economist, complaining, "All my economists say, 'On the one hand ... on the other.'"

"There's still a fair amount of angst over fiscal policy. And the level of the angst is definitely a function of whether you're a Republican or a Democrat," said Mark Zandi, chief economist at Moody's Analytics. "I think after the August recess, there's going to be a period of heightened tension because we do need to get a budget and we do need, more importantly, to raise the debt ceiling. And then as you move into next year and the elections, there's going to be more hand-wringing as well because of the political back-and-forth."

Even so, Zandi is optimistic. "We are going to start to see stronger growth. The fiscal drag will fade, the housing recovery will add more juice to growth, and the Federal Reserve will be able to manage through this in a reasonably graceful way."

Most economists see a slowly recovering economy, with bumps ahead. But not all. There's always an "other hand. "

"The economy is as sick today as it was prior to the financial crisis and the Great Recession. Those were caused by fundamental dysfunctions that remain unfixed," said business economist Peter Morici of the University of Maryland.

Federal Reserve economists are moderately upbeat, projecting that economic growth will climb next year to between 3 percent and 3.5 percent for the first time since before the Great Recession. The economy grew at a subpar 1.8 percent annual rate in the January-March quarter. And many economists forecast that growth slowed further in the April-June quarter because weaker economies overseas reduced demand for U.S. exports and because of shrinking U.S. wholesalers' inventories. The numbers aren't in yet.

The Fed has signaled that it intends to keep interest rates super low at least until the jobless rate falls to 6.5 percent. It was 7.6 percent in June.

Fed Chairman Ben Bernanke told Congress on Wednesday that the U.S. central bank had no firm timetable for scaling back its policies aimed at stimulating growth. The Fed would consider reducing its stimulus program if the economy improves, Bernanke said, but added that the reductions were "by no means on a preset course."

Stocks soared last week after Bernanke reassured a conference of economists that the central bank would pursue a "highly accommodative monetary policy for the foreseeable future," including keeping -- for now -- ultra-low short-term interest rates and an $85-billion-a-month bond-buying program designed to hold down mortgage and other longer-term borrowing costs. Wednesday's testimony to the House Financial Services Committee reprised those comments.

The White House, in its newly released "midsession review," projected the economy would grow 2.4 percent this year, down from the 2.6 percent it projected in April. White House officials blamed the lower estimate on across-the-board spending cuts that began in March and slower growth in China and Europe.

The White House was more optimistic about the federal deficit and the unemployment rate. It projected that the federal budget shortfall would decline to $759 billion for the fiscal year ending Sept. 30 -- the first time in Obama's presidency that the annual deficit will have dropped below $1 trillion. And the White House forecast said the jobless rate would fall to 6.8 percent for calendar year 2014, then down to 6.5 percent in 2015 and stabilizing at 5.4 percent by 2017.

Other forecasts aren't as rosy. The International Monetary Fund sees the U.S. economy growing at just 1.7 percent this year and 2.7 percent next year. And the nonpartisan Congressional Budget Office projects the economy will grow just 1.4 percent this year and the unemployment rate will average 7.9 percent -- absent changes in current law.

"It's an extremely difficult time to get the policy forecast right and that's driving the economic forecast," said Douglas Holtz-Eakin, a former CBO director who now heads the American Action Forum, a conservative public-policy institute.

What will the Fed, the Congress and the administration come up with? "Who knows?" he said.

[Associated Press; By TOM RAUM]

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