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D.C. budget bomb is holding back job growth

David Cote, Honeywell International chairman & CEO, discusses a series of possible outcomes facing the fiscal cliff dilemma, and gaining control of the Federal budget, with Sam Nunn, Nuclear Threat Initiative CEO.

It’s Washington, stupid.

Even as the U.S. economy begins to push up “green shoots” of recovery – from a housing market bouncing off the bottom to a buoyant stock market – businesses worried about the deep dysfunction paralyzing the political process have begun to hunker down.

The latest evidence of came from the government's monthly report on orders for so-called durable goods, which plunged in August. Much of the drop came from a cluster of cancelled orders for airplanes, even one of which can have a huge impact on the data.

But the rest of the data pointed to a wider pullback: orders for machinery fell 4.7 percent, computer orders dropped 2.9 percent, and communications equipment orders were down 7.1 percent. 

Economists say worries about what's happening in Washington are behind the pullback. 

“Businesses have become more pessimistic as we approach the fiscal cliff with no resolution in sight,” said Paul Edelstein, an economist at IHS Global Insight.

With a massive "fiscal cliff" of tax increases and spending cuts set to kick in at year end, Congress and the White House have all but quit trying to break the budget impasse. If the unprecedented belt-tightening takes effect next year, economists believe another U.S. recession would almost certainly begin. On Thursday, Fitch Ratings, which rates corporate and government bonds, warned that unless the budget bomb is defused, world economic growth will be cut in half next year.

Against that backdrop, business confidence has fallen to its lowest point since the third quarter of 2009, according to a survey of American CEOs by the Business Roundtable released this week. Though more than half of those who responded expect their sales to rise over the next six months, about a third said they plan to cut U.S. jobs over that period, up from 20 percent a quarter ago. Just 30 percent plan to boost spending on new equipment, down from 43 percent three months ago.

Until recently, American companies had managed to squeeze out more profits with very little new hiring, largely by getting more work out of the same labor force and by investing in new equipment that lowers costs and boosts output. Slower spending on capital equipment could slow or reverse that trend. 

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There’s been recent evidence that consumers are feeling more confident, which could help boost the spending category that accounts for 70 percent of the U.S. economy. The Conference Board’s latest monthly survey showed its confidence index rose by nine points to 70.3 percent.

But the improvement is relative, according to David Rosenberg, chief economist at Gluskin Sheff.

“It is one thing to say consumers are feeling better (maybe the respondents this time were card-carrying Democrats), another thing to say they’re feeling well. After all, to put 70.3 in perspective, the consumer confidence index averages 78 in recession and 102 in (economic) expansions,” Rosenberg said.

Weak growth ahead
Throughout the year, the economy has been adding jobs. But the pace has been too slow to make a significant dent in the unemployment rate, which is stuck above 8 percent some five years after the recession began. That makes this recovery the slowest, by far, of any since World War II.

The latest evidence of that slow growth came Thursday in the government’s final tally of gross domestic product for the second quarter, showing that the economy advanced at a weak 1.3 percent annual rate – slower than the initial estimate of 1.7 percent.

Roughly half of the revision came from better data on the impact of the Midwest drought, as the level of farm inventories turned out to be less than initially reported. The drought is expected to continue to weigh on GDP growth this year, according to Nigel Gault, chief U.S. economist at IHS Global Insight, which expects third quarter GDP growth of just 1.5 percent..

“The economy overall has only weak forward momentum,” he said in a note to clients. “The news from housing may be improving, but manufacturing is struggling now, because of weakness in exports and business fixed investment."

The latest weekly report on new claims for jobless benefits, seen by some as a bellwether of hiring patterns, fell 26,000 to a two-month low of 359,000. But the results may also indicate that fewer people are eligible for benefits as the weak labor market has forced more workers to take odd jobs or leave the work force altogether.

Despite gradual improvement in the job market, nearly 13 million people are still out of work. The Labor Department said Thursday its latest annual revisions show that it likely undercounted job growth in the 12 months through March by 386,000.

But even with the slight increase, the government’s data show that the economy produced roughly 140,000 new jobs a month since the recession ended in June 2009, or about 5.5 million. That’s far short of the nearly 9 million workers who were sidelined by the recession..  

The Fed’s latest effort to boost job growth has targeted the housing market with a plan to buy $40 billion in mortgage bonds every month - until further notice. The move has already nudged mortgage rates down to a new record lows of 3.40 percent this week, sparking another round of home refinancing’s. Those lower monthly mortgage payment swill free up a little more cash for consumers to spend.

But it’s not at all clear when or how pushing mortgage rates lower will create more jobs. That’s why the Fed’s policy makers were not in agreement on the latest move to try to boost growth.

“We are unlikely to see much benefit to growth or to employment from (another round of mortgage bond buying,)” said Charles Plosser, president of the Philadelphia Federal Reserve, in a speech Tuesday. ”Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.”

The stock market seems to think better times, or at least continued gains in corporate profits, lie ahead. Market indices are up nearly 13 percent off summer lows, which has added to household wealth.

Homeowners’ wealth has also gotten a lift from rising home prices, which have been up for the past six months in a row.

But the wealth hole created by the housing collapse was huge. From a pre-recession peak of $67.4 trillion in the fall of 2007, household wealth plummeted to $51.2 trillion in early 2009. As of the April-June quarter, it's climbed back to $62.7 trillion.

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