Sequestration policy among those impeding growth, economist says

Rocky Hill - The U.S. economy appears to be pretty resilient, despite government fiscal policies such as sequestration that are a huge drag on growth, a senior economist for Moody's Analytics said Friday at the Sheraton Hartford South Hotel.

Ryan Sweet, who tracks U.S. macroeconomic conditions for Moody's, told several hundred people at a Connecticut Business & Industry Association conference that government policies are weighing down gross domestic product growth by 1.5 percent - the biggest fiscal drag since World War II.

Sequestration, an effort to cut government spending that is expected to lead to government furloughs, will cut half a percent from GDP this year all by itself, he added.

Sweet said the full effects of sequestration have yet to be seen, and the economy's weakness has been masked somewhat by lower gas prices and a roaring stock market. But he predicted an economic slowdown ahead, with growth that had been above a 2 percent annual rate over the past few months falling below that level.

"The next few months are going to be weak," he said.

By the end of this year, though, he expects the economy to rebound again, creating the potential for growth exceeding 3 percent next year - not unusual during a recovery period.

"We've been down for so long that often people forget the economy can grow that quickly," he said.

Sweet said a recovery in housing could help lead the economic rebound. And he predicted that a surge is coming in young people living on their own for the first time, which will mean more demand for apartments and houses.

But Sweet said he worries about the job sector. Despite averaging growth of 200,000 jobs a month over the past half-year or so, there is still a considerable number of long-term unemployed who, if they don't find jobs soon, will become impossible to employ because of an erosion in skills, he said.

"The long-term unemployed are being left behind," he said.

On the positive side, however, corporate profits are high, setting the stage for a strong recovery when businesses feel more confident about the future, he said.

He added that the U.S. budget deficit is coming down dramatically, thanks to budget cuts and tax increases, and is now one-third of what it had been last year. But this is a double-edged sword, he said, because lower spending reduces the GDP. What's more, consumer spending could be limited, he said, by the current U.S. savings rate of less than 3 percent.

Overall, though, Sweet said the U.S. economy's performance has been "pretty impressive" given the forces that have been dragging against growth. He said private sector growth would be about 3 percent were it not for government fiscal policies.

Larry Bossidy, retired chairman and chief executive of Honeywell International and AlliedSignal, pointed out that automakers sold 15 million vehicles last year, a big surge from the previous few years. But he was less optimistic about the U.S. economy than Sweet.

"We should be growing more than 2 to 2.5 percent," he said.

With 12 million unemployed and 16 million underemployed, he said the percentage of working people is 63 percent - the lowest of any time since World War II.

"We do have a jobs issue in this country," Bossidy said during the conference's keynote address.

Bossidy also pointed to a huge increase in entitlement programs over the past few years, including a near tripling of food stamps. He added that Social Security disability payments and Pell Grants are more than double what they had been a few years ago.

Meanwhile, he said, 51 percent of the jobs that college graduates secure do not require a college education.

Bossidy said there appear to be more and more disincentives to work.

"I think we have to get our hands around that," he said.

l.howard@theday.com

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