Thanks to the failure of the Congressional super committee, unless existing law is changed, the U.S. economy is now poised to experience a significant slowdown in 2013.
Just how big could that slowdown be?
The Budget Control Act, which became law in August at the end of the debt ceiling crisis, included incentives for the super committee to reach a deficit-reduction deal. If the committee failed to reach a deal, the legislation specified spending cuts would automatically go into effect in 2013.
Back in August, Macroeconomic Advisers LLC, an economic forecasting firm, published an analysis on their blog estimating the impact of fiscal drag if the super committee failed and automatic spending cuts were triggered. According to that analysis, the automatic cuts could subtract as much as 0.7% from gross domestic product growth in fiscal year 2013.
Macroeconomic Advisers also posted a nice chart illustrating the fiscal impact of the super committee’s failure. The chart shows that the 0.7% fiscal drag in 2013 will come on top of the 0.1% drag expected from the initial round of spending cuts that were included in the deficit-reduction deal. That means the total drag in 2013 should actually be about 0.8%.
As the post states, the super committee’s failure, “would have considerable near-term consequences for the economy.” Macroeconomic Advisers reiterated this forecast last month, when the committee’s failure was all but imminent.
To make matters worse, as I mention in a recent Market Update piece, the automatic spending cuts will occur just as the Bush tax cuts are expiring. These tax cut expirations would be challenging enough under normal conditions, let alone happening at the same time automatic spending cuts are being triggered.
Given that in 2013 the U.S. economy will very likely still be struggling with the impact of consumer deleveraging and a moribund labor market, the resultant fiscal drag would increase the probability that the United States could tip back into a recession.