* Lifts uncertainty, but not threat of credit downgrade
* Spending cuts last thing U.S. economy needs now
By David Lawder
WASHINGTON (Reuters) - The tentative U.S. deal to
avoid a crushing debt default is at best a mild relief for the
U.S. economy that nearly stalled in the first half of the year
and has yet to show signs of any realistic pickup.
The plan for $2.4 trillion in spending cuts over a decade,
if backed by lawmakers, would help lift some of the uncertainty
that has weighed on investors, businesses and consumers
unsettled by talk about a possible new and deep U.S. financial
Still, it does not decisively remove the threat that the
nation's AAA credit rating could be downgraded, an action that
would raise borrowing costs across the board, and the prospect
of further cuts ahead will cut short any celebrating.
"This will have minimal impact on the economy. The cuts are
not there for the first couple of years, which really makes you
wonder if they're really going to happen at all," said Peter
Morici, an economics professor at the University of Maryland.
The prospect of spending cuts is the last thing the U.S.
economy needs right now, many commentators say.
Economists were stunned on Friday when data showed the U.S.
economy grew just 0.4 percent in the first three months of this
year -- perilously close to contraction -- and picked up
unimpressively to 1.3 percent in the second quarter.
Against the backdrop of the weak economic recovery, the
divided political parties in the U.S. Congress appear to have
agreed on one thing early on in their dispute over how to raise
the U.S. debt ceiling: that spending cuts to narrow the deficit
should be phased in slowly. They will be phased in from 2013.
President Barack Obama told reporters on Sunday that the
initial discretionary cuts, expected to be about $917 billion,
"wouldn't happen so abruptly that they'd be a drag on a fragile
economy." He added that "job-creating" investments in education
and research would be preserved.
But the bulk of the austerity has yet to be defined.
About $1.5 trillion of the planned savings will be decided
by a bipartisan congressional commission, leaving unanswered
the question as to whether the United States has the political
will to tame the country's growing debt pile once and for all.
Troy Davig, U.S. economist at Barclays Capital, estimated
that the deal would only cut $25-30 billion from government
spending in the first year, which could shave about a tenth of
a percentage point off economic growth.
"It's not a major drag on growth but when the economy is
only growing a point and a half, a lot of economists feel that
this is not the right time to be finding fiscal restraint. We
will be shifting from massive stimulus to massive restraint."
Steeper and faster spending cuts could have dealt a
knockout blow to an economy reeling from high fuel prices, bad
weather, Japan's earthquake and a depressed housing market,
plus a labor market that shows few signs of recovery.
LITTLE SCOPE FOR STIMULUS
Proposals discussed just a week ago included possible new
fiscal stimulus measures, such as extending payroll tax cuts
for employees and offering them to employers as well.
There appeared to be no room for them in Sunday's
preliminary deal which is expected to be voted on in the Senate
on Monday and sent to the House of Representatives for
approval. The bipartisan panel, which must draft more cuts by
November, could revisit the issue.
There could be some relief among U.S. employers and
consumers that taxes won't rise under the new, hard-fought deal
and that the worst-case scenario has been avoided.
The talks have been punctuated by warnings from the Obama
administration that financial chaos would ensue if the $14.3
trillion federal borrowing limit is not raised by Tuesday.
That angst has added to a pile of worries slowing consumer
spending decisions such as car purchases, according to Detroit
executives. Existing home sales in June fell sharply due a big
jump in canceled sales contracts.
Obama, too, said he has been concerned about the debt limit
battle's impact on consumer and business confidence. He said he
hoped Sunday's deal "will begin to lift the cloud of debt and
the cloud of uncertainty that hangs over our economy."
Any relief, however, is likely to be short-lived. U.S. jobs
data on Friday will probably prove another reminder of the weak
U.S. economy. Unemployment is expected to remain at 9.2
percent, according to a Reuters poll.
The budget deal "does nothing to restore household and
corporate confidence," said Mohammed El-Erian, chief executive
of bond fund investment giant PIMCO.
"So unemployment will be higher than it would have been
otherwise, growth will be lower than it would be otherwise, and
inequality will be worse than it would be otherwise," El-Erian
told ABC's This Week with Christiane Amanpour.
Just as Washington's political leaders have run out of
money to throw at the U.S. economy, the Federal Reserve looks
lacking in ammunition too.
The U.S. central bank waged an massive experiment in
monetary policy over the last few years to prevent the
2007-2009 recession from spiraling into a depression, slashing
interest rates to zero and pumping $2.3 trillion into the
ailing economy by buying debt,
The Federal Reserve is not expected to rush in to make up
for the loss of any stimulus to boost growth.
Atlanta Federal Reserve President Dennis Lockhart said on
Friday there would be a "very high bar" for more stimulus.
At least the deal taking shape in Washington would push the
scary prospect of a U.S. debt default out until after the 2012
presidential election. But investors worldwide will still worry
about the ability of the United States to avoid future
downgrades of its debt, a move that would probably push up
borrowing costs and act as yet another drag on the economy.
"Talk about kicking the can down the road, this is probably
the biggest can that's ever been kicked -- appointing another
commission to do the heavy lifting another day," Yale
University economist Stephen Roach told Reuters Insider.
(Reporting by David Lawder; Editing by Anthony Boadle)
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