But Robert Dye, chief economist at the banking firm Comerica, warns that many fiscal issues are still outstanding, with Congress seeking a difficult balance between sustaining growth and putting the federal budget on sounder footing by reducing future deficits.
“Right now it is reasonable to assume that a significant portion of the $110 billion sequester will happen,” he wrote in an analysis published in January by Blue Chip Economic Indicators. “It is reasonable to assume that the total fiscal drag from increased taxes and reduced spending will be in the neighborhood of 2 percent of GDP, primarily felt in the first half of 2013.”
The result, Mr. Dye says, could be an economy that grows very little (perhaps at a 1 percent pace) or not at all for the first half of the year. That would leave the economy much more vulnerable than usual to the risk of recession.
If more optimistic economists are correct, the outlook may be brighter. In the Blue Chip survey of more than 50 forecasters, some see the economy growing at a pace higher than 2 percent in the first quarter, rising to 3 percent later in the year.
That outlook banks on a continuing steady rise in activity within the private sector (which accounts for about 84 percent of all jobs) outweighing the braking effects of tighter fiscal policy.
Moreover, some economic analysts argue that the sequester, cutting federal spending by about $100 billion a year, doesn’t pose a risk to the job market. The conservative editorial board at The Wall Street Journal, for example, opined Thursday that the spending cuts “will help business and investor confidence by finally showing that government can restrain itself – at least a little and however crudely.”
Many Republican lawmakers appear ready to allow the spending cuts to go forward, in part based on similar reasoning that the economy would benefit more from government restraint.