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DC is a drag (on the economy)

By Mark Hamrick · Bankrate.com
Thursday, January 17, 2013
Posted 3 pm ET

Chief economists from the nation's largest banks look for growth to accelerate modestly in the second half of this year. They're betting the worst of the drag caused by the "fiscal cliff" in Washington, D.C., will lift after the first six months of the year, while conceding the risk that it could be even worse.

The outlook, released by a panel of economists with the American Bankers Association, comes with a big caveat. The group says the downside risks posed by tax hikes, a possible prolonged fight over the debt ceiling and the threat of sharp spending cuts this year could stop the economy "in its tracks."

Speaking to reporters at a Washington news conference, Scott Anderson, of Bank of the West, presented the group's view that economic output will grow at less than a 2 percent annualized rate in the first half of the year. The panel looks for an increase in the rate of growth to 2.6 percent in the final quarter of this year.

James Chessen, the ABA's chief economist, explained that as part of the process in producing the forecast, the economic advisory committee holds an off-the-record meeting with members of the Federal Reserve board, but that the outlook is not intended to reflect the central bank's opinions.

The group sees the chances of a recession this year at 23 percent, going down slightly in 2014 to 20 percent. The chance of a "severe recession" is said to be 8 percent this year and 5 percent next year.

Job creation is expected to weaken in the first half of 2013 before improving somewhat, but the unemployment rate is expected to fall to 7.4 percent by the end of the year. The December 2012 jobless rate was 7.8 percent.

The Federal Reserve has stated that it will use low interest rates to push down the unemployment rate to 6.5 percent. Anderson said the ABA panel doesn't see the 6.5 percent target being achieved until May 2015.

The group is less bullish on growth overall than the Fed itself. The committee looks for economic output to grow between 1.6 percent and 2.3 percent this year. The Fed's forecast, or "tendency," for growth is 2.3 percent to 3 percent this year. Anderson said the panel's sense is that "the fiscal drag is a bigger factor," referring to the budget stalemate in Washington, including the risk that mandatory budget cuts could still take hold.

Asked whether the Fed has tendencies to be overly sanguine, Anderson told Bankrate that "if you look at the record the last couple of years, they have been too optimistic."

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