Lombard Street Research: Unemployment to Pass 8%

Wednesday, 20 Feb 2013 08:19 AM

By Michael Kling

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Get ready for another recession and unemployment higher than 8 percent, as government budget cutting prompts zero or negative growth.

That’s the prediction of Lombard Street Research, according to CNBC.

Look for declining consumer spending and falling corporate profits also.

Editor's Note:
 
'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

“Our view that unemployment could rise above 8 percent and that profits will be squeezed reflects a forecast of nil to negative 2013 [first quarter growth], and further stagnation in [the second quarter],” warned a Lombard report.

The expiration of the payroll tax holiday, which increased the payroll tax from 4.2 to 6.2 percent, this year, will have a big impact on retail sales. Retail sales rose 0.1 percent in January.

“Retail sales data encouraged the idea that the payroll tax hike from 4.2 percent to 6.2 percent, worth 1 percent of personal disposable incomes, would pass off with little impact. But the effect of the payroll tax was only partly in January,” Lombard cautioned.

“In February the full effect of the payroll tax hike will be reflected in disposable income, and the initial savings ‘cushion’ is likely to give way, so real consumer spending could be down.”

Government spending has contributed a negative 0.4 percent on average to gross domestic product (GDP) over the last years, the research firm estimated, and could easily exceed that in the first and second quarters of this year.

Unless Congress intervenes, automatic government spending cuts, known as sequestration, are scheduled to go into place March 1.

“Our assumption is that the sequestration is canceled in favor of further cuts in a new provision,” Lombard said, according to CNBC. “But this means the contribution from public spending to GDP growth could well be more negative than the past -0.4 percent.”

Sequestration will slow the recovery and eliminate jobs, agreed the Economic Policy Institute, a left-leaning think tank.

Sequestration will lower GDP by 0.8 percent and eliminate 489,000 defense jobs and 469,900 nondefense jobs, the think tank estimates.

“Cutting government spending reduces aggregate demand and worsens joblessness while the economy is running well below potential output,” argued Andrew Fieldhouse, a policy analyst for the institute.

Republicans protest against defense cuts, saying they cut jobs, he said.

“Conservatives’ selective Keynesianism — which pops up in their advocacy for defense spending and tax cuts, among other priorities — applies to the rest of government spending and the national income and product accounts, too.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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