Tags: Budget | Cuts | Economic | Growth

PNC Economist Faucher: Budget Cuts Are Drag on Economic Growth

Tuesday, 26 Mar 2013 01:29 PM

Orders for long-lasting U.S.-made goods surged last month and home prices posted their biggest year-on-year gain in six-and-a-half years in January, the latest signs the U.S. economy regained momentum early in the first quarter.

But the upbeat picture was dimmed somewhat by other data on Tuesday showing a sharp drop in consumer confidence as Americans worried about the impact of tighter fiscal policy, particularly$85 billion in government budget cuts known as the "sequester."

"The economy continues to expand in the first quarter, but we do have a drag from the sequester," said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh.

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Durable goods orders jumped 5.7 percent in February as demand for transportation equipment rebounded, the Commerce Department said. The rise in orders reversed January's 3.8 percent plunge and handily beat economists' expectations.

While orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, posted their largest decline since July, the drop in demand in this so-called core capital followed a big jump in January and economists were largely unfazed.

"To the extent that the weakness in core capital goods orders was a partial retracement of the unsustainable big gains the month before, the constructive tone in business investment over the past few months remains largely intact," said Millan Mulraine, a senior economist at TD Securities in New York.

Shipments of core capital goods actually increased 1.9 percent, leading some economists to bump up their forecasts for first-quarter economic growth.

JPMorgan raised its estimate by 0.4 percentage point to a 2.7 percent annual rate, while Goldman Sachs upped its forecast by a tenth of point to 3 percent. The economy expanded at an only 0.1 percent pace in the fourth quarter.


A strengthening housing market is also giving the economy a lift.

The S&P/Case Shiller composite index of 20 metropolitan areas rose 8.1 percent in January from a year ago, its biggest rise since June 2006, a separate report showed.

It was the first time since March 2006 that all 20 metropolitan areas tracked by the index showed year-over-year price increases. On a month-on-month basis it rose 1 percent on a seasonally adjusted basis.

U.S. stocks rose on the data, with the Standard & Poor's 500 index closing in on its all-time high. The dollar was little changed against a basket of currencies, while U.S. Treasury debt prices rose.

A second report from the Commerce Department showed a drop in new homes sales last month after hefty gains in January, but they were up 12.3 percent from February of last year.

The report underscored the firming in home prices. The median sales price for a new home increased 3 percent from January to $246,800 and was up 2.9 percent from a year ago.

Rising prices are creating a wealth effect that is helping to cushion consumer spending against a recent hike in taxes.

"As such, consumer spending remains in a growth mode, despite the recent headwinds of higher taxes and diminished discretionary income," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

With the fundamental health of the U.S. economy improving, economists said they did not believe the drop in the Conference Board's index of consumer attitudes, which slid to 59.7 from 68 in February, to prove lasting.

"We expect consumer confidence to gain ground as the shock value of the sequester disappears," said Chris Christopher an economist at IHS Global Insight in Lexington Massachusetts.

Last month, overall orders for durable goods were buoyed by a 21.7 percent jump for transportation equipment as demand for civilian aircraft surged 95.3 percent.

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