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.
