Correction:

An earlier version of this article incorrectly described the event that Macroeconomic Advisers senior economist Ben Herzon said could lead to a “deep recession” in the United States. Herzon was referring to a refusal by Congress to raise the nation’s debt ceiling, not to the spending cuts known as sequestration.

Slow economic growth could mask solid economic recovery

Don’t be fooled by economists’ predictions of slower economic growth during the fourth quarter. The forecasts mask what many believe is a pretty solid recovery.

The government will release its first estimate of the nation’s gross domestic product Wednesday morning, and the consensus prediction is for a paltry growth rate of 1.1 percent. Some are expecting growth to slow to as little as 0.4 percent — barely above stall speed.

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But dig a little deeper, and the picture is not so grim. The third quarter was inflated by atypical increases in defense spending and business inventories that pushed the growth rate up to 3.1 percent.

As folks in the Washington area well know, defense spending is actually on a long downward spiral. And the fallback in business inventories to more normal levels alone will subtract 1.8 percent from GDP, according to Ben Herzon, an economist at Macroeconomic Advisers. Take out those two factors — and some funky math courtesy of Hurricane Sandy — and the economy doesn’t look so bad.

“It’s not an indication of things to come in the near-term,” Herzon said.

Business investment in equipment and software is expected to pick up after declining during the third quarter. Consumers probably spent more as households began to feel more secure in their finances. Though wages have remained largely stagnant, many families may feel wealthier thanks to gains in the stock market and housing prices. And housing itself is predicted to continue contributing to GDP after years of dragging it down.

“The headline is not obviously going to be as good . . . but the mix of growth is actually a little bit better,” said Richard Moody, chief economist at Regions Financial Corp.

An economy that is chugging along also suggests that the Federal Reserve will not make any changes to its target for long-term interest rates as it convenes Tuesday for its two-day policy-setting meeting. Just last month it took the unprecedented step of linking its efforts to stimulate the economy to specific thresholds of inflation and unemployment. Now it is expected to wait to see how that move plays out in the real economy.

But both the Fed and economists have warned that one thing could dramatically alter the nation’s economic picture: Washington.

Failure to raise the nation's debt ceiling later this year could throw the country into what Herzon called a "deep recession." Fed Chairman Ben Bernanke recently estimated that the massive federal spending cuts known as sequestration combined with this year’s tax increases could reduce GDP by 1.5 percentage points this year.

“I’ve really described 2013 as a battle between private-sector momentum and the increasing drag from the federal government,” Moody said. “It’s frustrating given that we’re finally beginning to see some light at the end of what was a long and dark tunnel.”

 
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