Economy seen as biggest winner as U.S. budget impasse eases

Fed Concern

U.S. stocks yesterday sustained their biggest drop in a month on news of the deal amid speculation it would increase chances the Fed will decide to taper its monetary stimulus when it meets next week. The benchmark Standard & Poor’s 500 index declined 1.1% to 1,782.22 in New York. Stocks fell a third day today, with the S&P 500 declining 0.2% to 1,778.41 at 10:33 a.m. in New York.

Since the political focus in Washington turned from fiscal stimulus to deficit reduction with the arrival of the new House Republican majority in 2011, each year has brought a greater fiscal drag on the economy. It culminated in this year’s “fiscal cliff” of tax increases and automatic budget cuts.

Feroli estimates that deficit reduction curbed U.S. economic growth this year by 1.8 percentage points while less- dramatic austerity in 2014 will lower growth by 0.7 percentage point, including the impact of the current deal.

Even so, after all the previous political tumult in Washington, some in the financial community weren’t ready to incorporate the agreement in their plans since it may yet fail. The accord faces a vote as soon as today in in the House.

No Guarantee

St. Louis-based Macroeconomic Advisers didn’t alter its forecast yesterday, said Joel Prakken, the firm’s chairman.

“Passage is not assured,” Prakken said. “Party leaders like it, many troops don’t. Hence, our wait-and-see attitude.”

The federal budget for the year retains some uncertainty with the debt limit set to run out as early as February. In the past, Republican members of Congress have attempted to use the legislation as leverage to win spending cuts.

Several economists interviewed by phone or e-mail yesterday estimated that, if passed, the deal would boost U.S. growth by 0.1 to 0.3 percentage point next year.

Before the agreement, economists expected U.S. growth next year to accelerate to 2.6% from 1.9% forecast this year, according to the median estimate of 67 economists surveyed by Bloomberg from Nov. 8 to Nov. 13.

Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said the deal will have “a small, meaningful but positive impact.”

“This is a reason to be a bit more optimistic that the recovery will kick into a higher gear in 2014,” Zandi said.

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