Economists at JPMorgan Chase believe the U.S. economy will continue to grow at a similar rate in 2013 as it did in 2012, according to the bank’s annual economic forecast (PDF). But things would be looking a lot better, they say, if it weren’t for steps Congress has already taken, and will continue to take in the coming weeks, which they predict will add “significant restraint to the economy’s growth outlook for 2013.”Congress set up all of these economic hurdles, and has already locked in a significant amount of austerity this year. But coming debates over spending cuts in the sequester and the need to raise the debt limit continue to cast a shadow of uncertainty over an economy that should be growing quite a bit more rapidly than it is right now.
The report anticipates that the unemployment rate will continue to drop slowly, and that housing will lead the way toward a more robust recovery by the end of the year, despite the austerity measures.
The largest single known source of drag, according to JPMorgan, will come from the lapse of the payroll tax holiday, which Congress allowed to expire at the end of the year.
“The evidence suggests that perhaps around 75 cents of every dollar in reduced payroll taxes is spent,” write JPMorgan economists Michael Feroli and Robert Mellman. “In this vein, if we assume a multiplier of around 0.75, then consumer spending next year would be reduced by close to $100 billion, or about 0.6% of GDP.”
Though Congress allowed the payroll tax cut to lapse with practically no debate, the struggle over Bush tax cuts for top earners nearly dragged the country over the fiscal cliff. But the fact that marginal rates will now rise for income over $450,000 will have a much smaller economic impact than returning the payroll tax to 6.2 percent. JPMorgan forecasts that higher marginal income tax rates and new taxes in the Affordable Care Act targeted at top earners will shave 0.2-0.3 percent off GDP in 2013.
But the biggest hit to the economy might be yet to come. If Congress doesn’t turn off the sequester, or, worse, allows the country’s borrowing authority to lapse, the impact on growth would be catastrophic. The forecast operates from the assumption that Congress manages to avoid most or all of the sequester’s across the board defense and domestic spending cuts and increases the debt limit, but describes failure to do so, and the risk of default as “the very low probability, high-cost risk in the current budget debate.”
In other words, Congress has already placed a lot of downward pressure on economic growth this year. Playing games with the debt limit could inhibit it even further — or worse.