Economic drag from government policies is fading

Bill O'Leary/The Washington Post - Shoppers at the District Holiday Market in downtown Washington, Dec. 5. A key measure of consumer confidence rose to its highest point since July, more than reversing the impact of the government shutdown.

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Washington is finally set to get out of the way of the nation’s economic recovery in 2014, fueling hopes for faster growth after years of sluggishness.

No major new rounds of government tax hikes or spending cuts are on deck. Optimism is growing that lawmakers will forge a deal on the federal budget next week and avoid the partisan gridlock that threatened to derail the economy a few months ago. Massive layoffs among state and local governments have largely ended, with many places now adding jobs.

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Some economists are forecasting growth as high as 3 percent next year. New data released Friday showing robust hiring in November suggested that the private sector already is gaining momentum.

“The only thing that has to happen is that lawmakers have to do nothing,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s a pretty low bar.”

Government policies over the past three years have created the largest drag on growth in at least half a century, according to his calculations. There was the end of the federal stimulus program in 2011, followed by a series of political showdowns that led to budget restraint the next year. This year, Washington lawmakers sharply cut back on spending and implemented the largest tax hike in decades, affecting all working Americans.

Yet the private sector recently has come to life. The Labor Department reported Friday that a solid 203,000 jobs were created in November and the unemployment rate fell to 7 percent. The job gains ranged across sectors, from construction to health care, and those who already were employed enjoyed an uptick in hours and wages.

In addition, the drop in the jobless rate was the result of the pickup in hiring. In previous months, declines have been driven by a shrinking labor force as many discouraged Americans gave up looking for work.

“This is just a clean sweep,” said Stuart Hoffman, chief economist for PNC Financial Services Group. “It’s a very good report. It’s across the board.”

Still, there was plenty of room for partisan posturing around even unequivocally strong data. The White House used the report to highlight the plight of the 4 million people who have been out of work for six months or more. The administration is calling for an extension of emergency benefits for the long-term unemployed, which are slated to expire at the end of the year, but the measure faces staunch opposition from House Republicans.

“It’s really important to peel the onion to its core to understand that while we are continuing to move in the right direction in this economy, the long-term unemployed continue to suffer disproportionately,” Labor Secretary Thomas Perez said in an interview.

Republicans said the data prove the opposite point: that the recovery is ready to stand on its own.

The November jobs report “includes positive signs that should discourage calls for more emergency government ‘stimulus,’ ” House Speaker John A. Boehner (R-Ohio) said. “Instead, what our economy needs is more pro-growth solutions that get government out of the way.”

Government’s fading role as an impediment to growth is only one of several reasons economists are more optimistic about next year’s prospects. The housing market, which was ground zero in the financial crisis, has become one of the bright spots of the recovery. Americans have dramatically reduced the huge amount of debt they carried coming out of the recession and have padded their savings.

“We all experienced the shock from the financial crisis. But I think households and businesses started early on in restoring their balance sheets, and that puts them on firmer footing right now,” said Beth Ann Bovino, U.S. chief economist at Standard & Poor’s.

Other data released Friday supported the rosier outlook. A key measure of consumer confidence — the Thomson Reuters/University of Michigan consumer sentiment index — rose to its highest point since July, more than reversing the impact of the government shutdown. Much of that jump came from households earning less than $75,000, according to analysts at RBS.

In addition, consumer spending rose 0.3 percent in October, more than analysts had expected. Shoppers particularly shelled out for big-ticket items such as autos, sending purchases of durable goods up 0.8 percent.

The key question is whether the improving data will be enough to persuade the Federal Reserve to start scaling back its stimulus program.

The central bank has been pumping $85 billion a month into the recovery by buying bonds, and investors have been watching closely for signs that it will begin to reduce that pace. Fed officials are slated to meet in Washington this month, and Friday’s data will likely factor heavily into their decision.

Some economists think the central bank will wait for even more information — and make sure that Congress meets new deadlines early next year for deals on the budget and debt ceiling. Others argue that the economy has already proven its strength.

“If you’re going to wait until every single fiscal issue is resolved, you’ll be waiting forever,” said Paul Ashworth, chief North American economist at Capital Economics.

Risks remain despite the optimism. The economic recovery is littered with flawed projections of faster growth. There are other possible shocks — from the expiration of unemployment benefits to mismanagement of any slowdown in Fed stimulus.

And the hopes that the vicious cycle of fiscal crises is finally over could always prove illusory.

“Any wager on Washington being reasonable,” Bovino said, “is a dangerous bet.”

 
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