The recent payroll gains and the declining unemployment rate in the US have raised hopes that the economy will now start growing faster than the tepid 1.7 per cent rate last year. Optimists are expecting growth rates as high as three per cent for this year and next.
I hope they are right. While payroll employment has recently been rising by more than enough to absorb the growth of the labour force, the expansion in gross domestic product has been weak and most of that increased production has one into inventories.
There are strong headwinds that will make it difficult to achieve a robust recovery. The most important is the large tax increase that will occur next year unless there is legislation to block it. The Congressional Budget Office predicts that, under current law, the revenue of the federal government will rise from $2,456bn in the current fiscal year to $2,968bn in the following fiscal year. A sustained tax increase of that magnitude would push the US into a new and deep recession next year.
Many political analysts are predicting that Republicans will maintain control of the House of Representatives and become the majority in the Senate but that Mr Obama will be re-elected. While this “most likely” outcome may not occur, the potential tax consequences pose a serious risk to the economy not only in 2013 but this year as well. Continue reading »