US Economy Fails To Escape The Shackles Of Debt – Initial Strong Start Isn’t Going To Last

Although the US economy saw a strong start to the year 2013, the largest economy of the world is yet again set to slow down as some of the consequences of government spending cuts take hold, leaving back the extraordinary stimulus of the central bank. The US labor market is expected to heal in 2013 even after witnessing the disappointing weak job gains and the sluggish housing recovery. Both these economic moves will bar the economy from cooling too much. There are many investors who pay Wall Street for financial advice and all of them are expecting 2013 to be the year when the economy will finally break out of the shackles of debt and all the other issues.

However, it is pretty unfortunate to note that the chains haven’t come off yet and the string of disappointing data comes in the form of some key areas like hiring, retail sales as they still plod along. Upcoming reports on housing and manufacturing will not show that the economy is breaking free and clear of all the shackles. Chief US economist at Barclays Capital, Dean Maki thinks that the Americans are still roughly in the 2% environment. He tells this to the firm’s clients and this will probably be the case throughout the rest of the year.

The latest job report according to the Reuters

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Economists in a Reuters poll forecasts for 1st quarter growth to an annualized 3% from the 2% forecast last month. However, they’re also of the opinion that this pace isn’t expected to last and might even slow down to 1.6% in the second quarter before picking up to 2% for the rest of the year. The consensus for the first quarter is the highest since polling began throughout the period of October 2011 and the expectations for the second quarter is the lowest. Michael Gapen, senior US economist at Barclays Capital expects growth rate to slow down but he wouldn’t throw this to the category of ‘spring slowdown’.

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It has been few years that a solid start has been followed by a weaker spring but last few years had too much to do due to the flare-ups in the euro-zone debt crisis. In the year 2013, it is nothing but a large fiscal policy drag in the US. The economists also estimated that fiscal tightening will take 1.8% points off the growth in 2013, as compared to 1% in each of the past 2 years.

Are the spending cuts starting to hurt the economy?

Did you know that across the board, spending cuts of $85 billion went into effect in the beginning of March, 2013? Apart from reducing spending, the hit to the economy might even show up through actions like lost contracts in the defense sector, furloughs and even job cuts. A truck and military vehicle maker said on Tuesday that it will cut down 1000 jobs in its defense business due to the US budget cuts. Consumer spending could also cool down after holding up surprisingly well in the first few months of 2013.

As the payroll taxes increase at the beginning of the year, the economists expected that this would prompt the Americans to curb the purchases as consumer activity makes up about 2/3rds of the economy. The tight and stringent fiscal policy and an economic recovery that is still susceptible to setbacks suggest that the Federal Reserve will leave its stimulus efforts for another year. The key offset has always been the monetary policy of the economy. There’s an ongoing battle between monetary stimulus and fiscal drag and the Fed is winning, says Jim O’Sullivan, a chief economist.

The latest round of QE3 was rather open-ended and the central bank said that it will continue this program until there’s some remarkable improvement in the US labor market. The number of analysts calling for the Federal Reserve to complete this bond-buying program has also come down gradually in the last 3 months. There are only 7 respondents that expected the Fed to end its present round of QE while some others thought that the bank would extend this program to 2015.

Although the consensus for 2013 expected the unemployment rate to steadily improve in 2013, the economists are of the opinion that the unemployment rate will not fall below 6.5% in 2015. Apart from the unemployment rate, the housing has long been a thorn in the side of the economy and was likely to recover last year with a 7.1% gain in the home prices in 2013. So, this means that economy is certainly not going through a positive phase as the initial growth rate couldn’t pull through. So, this means that economy is certainly not going through a positive phase as the initial growth rate couldn’t pull through and due to the rising debt problems.

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