WASHINGTON – As economic policy goes, experts say, the automatic spending cuts slated to begin Friday won’t leave a deep scar on the U.S. economy, which is otherwise looking pretty good. They are a fiscal speed bump on the road to economic recovery, which is why the stock market is nearing an all-time high despite Washington’s latest display of legislative paralysis.
That is a marked change from the past two years, when budgetary battles rattled consumer and business confidence and triggered big selloffs.
“Businesses and consumers have begun to look away from the histrionics and the battles going on in Washington,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “They’re beginning to realize that organic growth in the private economy is beginning to pick up speed.”
From Wall Street to Main Street, Americans are too busy spending, hiring and investing to panic over the latest budgetary melodrama on Capitol Hill. They have seen this movie before, and this time, the ending doesn’t scare them.
Competing Democratic and Republican measures to avoid the government spending cuts failed in the Senate on Thursday, putting the U.S. on course to see $85 billion automatically slashed from government spending, an outcome that both parties had said they wanted to avoid but were unable to overcome because of the bitter partisan rancor gripping the government.
The plans were doomed even before the vote, but were placed in consideration as a tactic to allow senators to underline their partisan loyalty and save their parties from public blame for any resulting inconvenience or disruption in government services.
Even as Friday’s trigger date for the cuts drew near, Americans were pouring money into the stock market. The Dow Jones industrial average has jumped nearly 8 percent this year and is approaching a record high.
The index came within 15 points of its all-time high Thursday afternoon, but the momentum petered out and the Dow and other indexes broke a two-day winning streak and closed lower. The Dow ended down 20.88 points, or 0.2 percent, to 14,054.49, while the Standard & Poor’s 500 index slipped 1.31, or 0.09 percent, to 1,514.68. The Nasdaq composite index edged down 2.07, or 0.07 percent, to 3,160.19.
Consumers are also growing more confident. And last month, orders for U.S. factory goods that reflect companies’ investment plans surged by the most in more than a year.
The stakes are not nearly as high as they were two months ago, when lawmakers engaged in a budget standoff over the so-called fiscal cliff. Economists had warned that the cliff’s tax increases and spending cuts would send the economy back into recession if they remained in place for much of 2013.
By contrast, no one is talking about a recession this time, no matter what Congress does or does not do. The financial squeeze will be milder. And it will be delayed.
For one thing, the cuts are smaller than they seem. Actual spending will likely drop $44 billion in the budget year that ends Sept. 30, according to the congressional budget. That is only slightly more than 1 percent of federal spending. Of that, about 80 percent will come from discretionary programs. The rest will come from Medicare and other entitlement programs.
In addition, federal agencies must give workers a month’s notice before imposing furloughs, which will likely force many to take one day a week of unpaid leave indefinitely. So the pay and spending power of government workers and many contractors won’t be affected until April at the earliest.
Perhaps more important, the delay gives lawmakers time to seek a deal that might retroactively reverse the spending cuts before they can do much damage to the economy.
Not that the spending cuts won’t hurt many workers and consumers. And the longer the cuts are in place, the more they will slow growth, depress hiring and keep unemployment stranded at high levels.
If the automatic spending reductions are not reversed, they will reduce economic growth in 2013 to 2 percent from 2.6 percent, wipe out 700,000 jobs and keep unemployment at 7.4 percent or higher through 2014, according to calculations by the forecasting firm Macroeconomic Advisers.
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