It’s not even part of the fiscal cliff discussion.
Goldman’s Jan Hatzius takes the pulse of the economy, and mostly thinks things are getting a little better.
GDP is now back to tracking at 3.0%, which is hardly robust, but a bit better than where it’s been.
The jobs report was confusing and mixed…Hatzius sees reasons for optimism and pessimism in it.
But one thing he’s certain about is that the economy is almost guaranteed to suffer a fiscal hit in the near future, and that leaders in both parties don’t seem intent on avoiding it.
This is from his newest note.
“Although the present situation looks a bit better, we think the risks to growth over the next few quarters are skewed to the downside. The biggest concern is fiscal policy, where we see three scenarios: the not-so-good, the bad, and the ugly. Even if most or all of the Bush tax cuts are extended and most of the automatic spending cuts are postponed, fiscal drag is likely to shave 1½-2 percentage points from GDP growth in early 2013, up from ¾ percentage point in 2012. Despite the healing in the private sector and the Fed’s push for easier financial conditions, that probably means a renewed growth slowdown to 1½% in early 2013.
We are surprised that neither party has seriously challenged the case for near-term fiscal retrenchment. In particular, the expiration of the $126bn payroll tax cut (1% of disposable income) is almost universally accepted. This expiration alone is likely to shave 0.6 percentage point from 2012 growth on a Q4/Q4 basis—the same order of magnitude as the estimated boost from QE3—at a time when investors are lining up to finance US government expenditure at a real 10-year yield of -0.8%. While we agree that the US government will ultimately need to tighten its belt, a big move in a restrictive direction still looks decidedly premature to us.”
The fact that a payroll tax cut extension isn’t on the table is pretty depressing, and more broadly that neither party is really willing to say: Fiscal retrenchment right now in this economy is beyond insane. Both parties have their agenda (tax hikes, certain kinds of spending etc.) but nobody is standing up for the deficit status quo.
See on www.businessinsider.com