'Cliff' Deal Seen Hitting Growth

January 11, 2013

The Wall Street Journal

Phil Izzo

Washington's last-minute deal on the fiscal cliff left many questions unanswered and will trim about 0.7 percentage point from growth in 2013, according to economists in the latest Wall Street Journal forecasting survey.

"Washington punted on the tough issues that sorely need addressing," said John Silvia of Wells Fargo & Co. The agreement "sets us up for continued uncertainty on major fiscal issues."

Just 18 of the 50 surveyed economists, not all of whom answer every question, said the deal to avert the fiscal cliff by extending tax rates for most Americans and delaying spending cuts was good for the economy. On average, they said growth this year will be 0.7 percentage point lower than it would have been if policies from 2012 had been extended. "Fiscal gridlock is preventing the recovery from gaining steam," said Julia Coronado of BNP Paribas BNP.FR -0.77% .

The economists expect the economy to expand at a tepid 2.3% pace in 2013, barely above the 2% rate they estimate for growth last year. That isn't fast enough to bring down the unemployment rate quickly. On average, the economists still expect a 7.4% unemployment rate at year-end, compared with the current 7.8%. They don't see unemployment falling below 7% until sometime in 2015.

Though the economists were largely unimpressed with the deal to avert the fiscal cliff, only 15 respondents said the agreement is actively bad for the economy. Indeed the average odds of a recession in the next 12 months tumbled to 19% from 24% last month, the first time they have been below 20% since last June.

The biggest problem with the deal is that it sets up more showdowns in coming months and leaves some degree of fiscal uncertainty, according to the economists. Between now and March, Congress will have to deal with the spending cuts that were originally part of the fiscal cliff, Treasury hitting its borrowing limit and funding government operations for the rest of the year. "These short-term deals ensure we jump from crisis to crisis," said Mr. Silvia of Wells Fargo.

Thirty-six economists said bad fiscal policy remains the biggest potential pitfall for the economy this year. "Resolving the big issues is likely to be an even nastier process than what we just went through," said Ellen Zentner of Nomura Securities International.

Amid considerable gloom, there is a flicker of hope. The economists put just a 7% chance that the U.S. will default on its debt instead of reaching a deal to raise the borrowing limit. Another bright spot: On average, the economists expect home prices to rise 3.7% this year, as housing continues to rebound. Meanwhile, they put higher odds—24%—on the U.S. having faster-than-expected growth than a recession.

Faster growth "isn't out of the question, but the government needs to get out of the way," said Don Leavens and Tim Gill of NEMA Business Information Services.

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