Four Reasons Why The Economy Will Continue To Beat Out The Fiscal Drag


U.S. growth has outpaced the economic shock of the sequester, according to Societe Generale’s chief U.S. economist Aneta Markowsa.

And it’s reason to suspect the Fed will begin to taper its stimulative bond purchases, she writes in a new report to investors.

While market watchers speculate themselves into insanity, Fed Chairman Ben Bernanke has been largely explicit when it comes to the timeline for the quantitative easing slowdown — it’s tied to economic data.

Bolstered by auspicious indicators like June’s 195,000 new jobs, that economic data may mean the Fed’s taper will come sooner rather than later.

Of course, just months ago politicians were busy playing a blame game over the sequester, the spate of cuts that was supposed to spur a significant negative shock on the economy — the kind that could hurt a burgeoning recovery.

To a certain extent it did, with summer furloughs netting an economic impact of about 35,000 full time job cuts, according to Societe Generale.

So what gives?

According to Markowsa, growth has simply outshined the negatives, and the taper will be on its way as summer turns to fall. 

If US growth continues to hold near 2% in the face of a fiscal shock that’s removing 1.75% from the economy this year, than one must conclude that the underlying growth has accelerated sharply and may be running between 3.5%-4%. We believe this is why the Fed has turned more optimistic on the outlook and has brought forward the timeframe for tapering. 

Markowsa provides four main reasons why SocGen is confident the economy will stomach this dose of fiscal restraint enough to prompt a September (or earlier) taper.

  1. Empirical evidence points to smaller fiscal multipliers when there is an offsetting monetary response. We believe the Fed delivered strongly on this point.
  2. The positive side effect of the recent fiscal tightening is that it stabilised the debt trajectory for the next 10 years and significantly reduced policy uncertainty. This new visibility should boosting business confidence and support hiring.
  3. We believe that private demand is accelerating on the back of housing investment and rising home prices. We project a combined contribution of 1% to growth this year, enough to offset a significant portion of fiscal restraint.
  4. Lastly, inflation surprised sharply to the downside in the first half of the year, offering a boost to disposable real income and offsetting a portion of the tax-related squeeze. 

For all the political bluster surrounding the sequester, at least it threw a bucket of water on post-crisis uncertainty.

This fall, however, politicians will again argue whether or not to raise the debt ceiling. So there’s that to look forward to.

socgen uncertainty index

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