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Render Unto Caesar

January 10, 2013

After a slow start, we expect the private sector to steadily build momentum over the course of the year, which will be needed to offset the drag from cuts in federal government outlays.
-Wells Fargo Economics Group

Render Unto Caesar

The fiscal cliff was resolved in a way that created slightly less
fiscal drag than we expected in our previous forecast. Tax rates
were increased for families earning more than $450,000 and
the payroll tax holiday on Social Security taxes was allowed to
expire. The new taxes supporting the Affordable Care Act also
took effect as planned. Federal funding for extended
unemployment benefits was renewed, however, as was bonus
depreciation on capital spending. There was a “permanent” fix
to the Alternative Minimum Tax. The sequester was put off for
a couple of months, and possibly made more difficult, as the
changes in tax policy added $3.9 trillion to the CBO’s 10-year
deficit projects, a sum nearly equal to the amount that the
unsuccessful Bowles-Simpson plan intended to cut.
With taxes rising less than earlier projected, estimates for
consumer spending and business fixed investment have been
increased ever so slightly. Consumer spending is now expected
to rise at a 1.6 percent pace for all of 2013, up from 1.3 percent
a month ago. Business fixed investment is expected to rise
0.9 percent this year, up from 0.5 percent in our last forecast.
The relative paltry gains in the private sector largely reflect the
uncertainty surrounding the fiscal cliff, which caused
economic activity to pull back at the tail end of 2012 and at the
beginning of 2013. After a slow start, we expect the private
sector to steadily build momentum over the course of the year,
which will be needed to offset the drag from cuts in federal
government outlays.

 

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