Experts: Sequester Would Squash Recovery

Monday, 28 Jan 2013 10:52 AM

By Michael Kling

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Automatic spending cuts, known as a sequester, would squash the economic recovery, experts warn.

Unless Congress acts, about $1.2 trillion in defense and nondefense spending would be slashed from the federal budget on March 1. Congress planned the automatic cuts in an effort to force itself to address the deficit.

If Congress doesn’t intervene, the sequester would reduce gross domestic product by 1 percent and increase unemployment by 1 percent, Tony Nash, managing director at IHS Consulting, told CNBC.

Editor's Note: The Final Turning Predicted for America. See Proof.

“If the sequester kicks in and some other tax issues kick in, … you’re looking at a lot of risk in the first half of the year,” Nash said.

“There’s the sequester, the continuing [budget] resolution talks, the debt ceiling, so there is serious risk in the U.S. in the months ahead.”

Investors have been moving money out of Treasurys and into riskier assets, but analysts at Barclays predict that that trend will reverse when investors realize the extent of the fiscal problems, CNBC reports.

“We also believe that the market is underestimating the extent of the fiscal drag likely to prevail over the next few years,” the analysts stated in a note, according to CNBC.

Other experts, however, believe any reversals from political problems would be temporary and would only offer investors an opportunistic chance to jump into stocks.

“We do have the debt ceiling talks coming up and if you get any weakness from that, then you should take it as an opportunity,” Steve Brice, chief investment strategist at Standard Chartered Wealth Management, told CNBC. “If we get through the debt ceiling talks, maybe we could see some more confidence coming through from the U.S. corporate sector.”

Forecasting firm Macroeconomics predicts the spending cuts would reduce economic growth by 0.7 percentage point this year, the Financial Times reports.

“It would have a big impact on the economy, especially now that the payroll tax cut has expired,” Gregory Daco, an economist at IHS Global Insight, told the Financial Times. “Any further drag on growth means it’s going to take more time to recover to pre-recession employment levels, for the housing market to recover.”

Editor's Note: The Final Turning Predicted for America. See Proof.

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