JP Morgan: "Fiscal Policy Will Cut Our 2.7% 2012 GDP Forecast To Sub 1%"
Sorry Hatzius, you snooze you lose. Your position as the most anticipatory, if far-less than credible (courtesy of your horrible December 2010 call) econo-forecaster on Wall Street has just been relinquished to JPMorgan's Michael Feroli who has been eating your breakfast for the past two quarters. Feroli, who yesterday warned that NFP could come in well short of the firm's forecast 45,000 on Friday (to be followed by his colleague telling Bloomberg TV a negative print is quite possible), has just fired the first shot not at merely 2011 GDP, but 2012. As a reminder, Jamie Dimon's firm had previously expected a 2.7% rate of economic growth next year. Well, it may be time to cut that to sub-1%! Quote Feroli: "All in all, by our estimates federal fiscal policy will subtract around 1-3/4%-points from GDP growth next year. Given that GDP growth has been 1.6% over the past four quarters when fiscal policy has been much less of a drag, this doesn't bode well for next year. There are elements of uncertainty in our 1-3/4%-point drag estimate, and the largest such uncertainty is probably political, as some measure could get extended. Respecting that uncertainty, it does appear that fiscal policy poses a downside challenge to our projection for 2.7% GDP growth in 2012." That's right: Jamie Dimon is right now on the phone with Bernanke screaming at the bald Princeton historian that his chief economist anticipates sub 1% GDP in 2012 unless the Fed starts printing. And printing it shall start. Remember: FOMC - August 9. Set your calendars.
Subsequent to yesterday's short note on the debt deal we have since received the CBO's score of the budget package. That deal cut future deficits through two avenues: already-decided caps on discretionary outlays, and yet-to-be-determined spending cuts and revenue increases recommended by the yet-to-be-formed Select Committee on Deficit Reduction. The CBO only scored the first of these two measures. As far as near-term implications, CBO foresees in 2012 a $21 billion reduction in outlays relative to the March baseline. Assuming an output multiplier of 1.0 -- which would be at the low end of the range of econometric estimates -- this implies about 0.14%-point less GDP growth next year.
Regarding the cuts that CBO didn't score, one of two things can happen: either the Committee successfully finds $1.5 trillion in deficit savings over ten years, or they are unsuccessful and sequestration automatically reduces spending by $1.2 trillion evenly over ten years beginning next October, with the onset of fiscal year 2013. In the former case, if we assume the cuts ramp up slowly, as is the case with the discretionary caps, then this might add about another $20 billion of fiscal tightening in the coming year. If the latter, we would also see spending decline by a similar amount, though all back-loaded in the last quarter of 2012. As such, regardless of how the Committee fares, it appears that a first rough estimate is that the total tightening implied by the recent legislation would subtract about 0.3%-point from GDP growth next year.
This drag may appear fairly small, but it is on top of the substantial tightening that was already in place prior to the passage of the debt deal. Most of that fiscal tightening comes about through the automatic expiration of temporary stimulus measures. The table below details those measures, the largest of which is the one-year 2%-point payroll tax holiday, which expires next January. Other large programs that are scheduled to expire or phase out are emergency unemployment benefits, accelerated depreciation, increased transfers to the states, and much of the remaining spending associated with the 2009 Recovery Act. All in all, by our estimates federal fiscal policy will subtract around 1-3/4%-points from GDP growth next year. Given that GDP growth has been 1.6% over the past four quarters when fiscal policy has been much less of a drag, this doesn't bode well for next year. There are elements of uncertainty in our 1-3/4%-point drag estimate, and the largest such uncertainty is probably political, as some measure could get extended. Respecting that uncertainty, it does appear that fiscal policy poses a downside challenge to our projection for 2.7% GDP growth in 2012.