How to stomp on promising developments in the economy: Austerity

Luckily people seem to be taking the correct lesson from Friday’s job report: the economic recovery is (yet again) assuredly not on track. The first three months of 2013 saw average job gains of 168,000, down from the 183,000 monthly average for 2012.

This is a real shame, because there are some real reasons to think that 2013 could have turned out better than 2012 in the economy. Housing has stopped dragging on growth, and the state and local sector has gone from utter freefall to almost-stabilization.

Take the improvement from 2011 to  2012 in both of these—this combined boost was roughly 0.5% of GDP. Imagine for a second that this rate of improvement characterized 2013 as well—we’re a full half-point of GDP ahead of the game, right?

                           The Good News: Housing and SL Spending Improve
2010 2011 2012 2011-2012 swing
Residential investment -0.14 0.09 0.34 0.25
State and local spending -0.47 -0.33 -0.13 0.20
Source: BEA NIPA table 1.1.2

Sadly, we have DC policymakers who have decided to stomp on any improvement with steep cuts and the repeal of the payroll tax cut without any useful replacement. As we estimated here, the combined effect of the payroll tax cut ending and the sequester (and spending cuts baked into the cake even before the sequester kicked in) are likely to subtract more than 1.5% off of GDP growth for the year.1

Frustrated about the slow pace of recovery? Blame those in Congress insisting on damaging cuts.

1 Note that the number for the sequester in that table is slightly high—the 2-month deferral negotiated in December will slightly reduce its drag in 2013).