Deutsche Bank’s bullish chief economist Joe LaVorgna offered a positive take on mandatory spending cuts and the lack of an extension for the payroll tax holiday.
LaVorgna says the near-term fiscal drag is overstated because spending cuts won’t occur until 2013; while the payroll tax didn’t have a big impact on growth in 2011 and would be even less effective in 2012.
Here’s the note:
In terms of fiscal drag, the automatic spending cuts that go into effect absent a Super Committee deal do not kick in until January 2013. Therefore, there is no drag as per the Super Committee in 2012. However, failure to extend the payroll tax holiday could be a mild negative on growth next year, and it appears some business spending is being pulled forward into this year in order to take advantage of 100% depreciation. Thus we should see some very modest fiscal drag, perhaps a few tenths of one per cent, which really is not very much. Why? One, the payroll tax holiday did not provide much if any lift to spending this year, contrary to what we had forecasted. This could be due to the fact that it was temporary or possibly because the average worker saw a relatively small increase in his/her paycheck of roughly $16 per week. Two, the economy-wide capital stock is barely growing which means that companies will continue to need to revamp their capital infrastructure regardless of tax treatment. Put another way, cash flush companies were bound to lift capital spending regardless of whether there was an incentive to do so. This is evident from the recent improvement in the 6-month outlook for capital expenditures according to both the NY and Philadelphia Fed purchasing managers’ surveys. Of course, it is still possible that Congress agrees to a payroll tax extension by year end. The bonus depreciation allowance, though, will fall from 100% at present to 50% next year as planned. On the spending side, the government sector may not be much of a drag next year if recent trends continue.