After sputtering for several years, the U.S. economic engine finally seems poised to fire on all cylinders. If only the federal government can patch up that unsightly pothole it created about a mile up the road.
For the third consecutive year, solid first-quarter job growth and budding hopes for a stronger recovery are tempered by the specter of a midyear swoon. In the past, Europe's financial crisis, Japan's earthquake and the debt-ceiling showdown in Congress slowed early-year economic surges.
This year, private-sector momentum is threatened by January's payroll tax increase and across-the-board federal spending cuts that will likely affect the economy in a couple of months unless the White House and Congress reach a deal to delay most of them.
Yet this time is different, experts say, because the underpinnings of the economy are sturdier.
Both households and businesses have shed much of the debt they amassed before the recession, leaving them freer to spend and invest. The housing market is finally turning around, and stocks have rallied to all-time highs. Consumers and corporations seem inured to Washington's dysfunction after the biggest potential tax increases were averted by the New Year's fiscal cliff deal between Congress and President Obama.
"The private sector is kicking into a higher gear," says Mark Zandi, chief economist of Moody's Analytics.
Reports last week showed February retail sales and manufacturing output beating estimates and business confidence growing. After strengthening in February, though, a measure of consumer sentiment slipped in mid-March amid the looming budget cuts, the payroll tax increase and rising gasoline prices.
There are other risks. The eurozone economy could contract again in 2013, hindering U.S. exports. And some economists say the housing upturn could be gradual.
The economic crosscurrents pose a dilemma for the Fed, which begins a two-day meeting today. The Fed is buying $85 billion a month in government bonds to keep long-term interest rates low and spur more borrowing by consumers and businesses, and to encourage bond investors to buy stocks.
Several Fed policymakers, such as Kansas City Fed chief Esther George, have voiced concerns about the program's costs and growing risks, including eventual higher inflation. Some have suggested the Fed could reduce or end the bond purchases well before the end of the year, according to Fed meeting minutes.
But in testimony before Congress this month, Fed Chairman Ben Bernanke reiterated that the Fed intends to keep the stimulus going until the job market improves substantially. Some Fed officials, including Chicago Fed chief Charles Evans, have suggested that could mean at least six months of 200,000-plus job additions or a 7.2% unemployment rate.
Job growth has averaged 205,000 the past four months, up from a pace of 154,000 in July through October. In February, job gains surged to 236,000 and the unemployment rate fell to 7.7% from 7.9%.
Economists will be scouring the Fed's post-meeting statement on Wednesday for signals that it may rein in the purchases later this year. In a report titled "Are the Good Times Back?" UBS economist Drew Matus said he expects the Fed to delete its reference to the need for the job market to improve substantially before it scales back bond purchases.
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