Panel’s failure likely to curb growth

November 25, 2011 at 12:00a.m.

McClatchy Newspapers

WASHINGTON

This week’s failure by Congress to reach a deficit-reduction deal likely is to have negative short-term and longer-term economic consequences. The failure puts more headwinds in front of the sluggish U.S. economic recovery, whereas a successful deal would have created a significant tailwind to give it a boost.

When Congress avoided a debt default over the summer through a compromise that created the Joint Select Committee on Deficit Reduction, it charged the bipartisan panel with finding at least $1.2 trillion in deficit cuts over the next decade before a Nov. 23 deadline. That’s days before one of the most important stretches for the U.S. economy — the holiday season, when consumer spending drives everything. The panel’s failure likely won’t spur consumer confidence.

“It was ill-timed to begin with, to pick Nov. 23 and to actually come out empty. They could have been superheroes, and instead they were super zeros,” said Stuart Hoffman, chief economist for PNC Financial in Pittsburgh.

By failing to agree even on extending the 2 percent payroll-tax holiday that has been in effect this year, lawmakers have added a huge dose of uncertainty to 2012 and shaken business and consumer sentiment. If the payroll-tax-cut holiday isn’t extended, it’s sure to retard growth, beginning in just a few weeks.

“That to me probably cuts half a percentage point of economic growth next year,” Hoffman said. He now expects growth in the range of 2 percent, so slow that the economy is vulnerable to tipping back into recession. “It’s on the knife’s edge of the so-called stall speed. The lack of any resolution both adds to the uncertainty, increases the odds that the tax won’t get extended into next year and goes to show that our political leadership is so hopelessly divided.”

Similarly, Barclays Capital Research, an arm of the London-based banking giant Barclays, projected Wednesday that failure to renew the payroll-tax holiday will shave a full percentage point off of U.S. economic growth during the first three months of 2012 and another half a point off the second quarter.