The current US debate on funding the government and the pending discussion of limits on the federal government’s borrowing authority highlight the focus on what role government should play in private business and in the life of the citizenry. The debate is an offshoot of the country’s emergence from a very deep recession, government spending intended as stimulus, the passage of major legislation on the financial sector, heated discussion about the health care sector, and the longer-term fiscal health of the country. The debate also has much to do with what will be considered "normal" economic growth when the economy adjusts to a new equilibrium in the coming years.
Our underlying economic forecast is for continued slow growth of around 2 per cent, in inflation-adjusted terms, for 2013, with a modest improvement in 2014. Of course, the current fiscal debate could alter that path. History would indicate (yes, Americans have argued this way before) that a minor reduction in current period growth during a brief shutdown may be recaptured in the subsequent period.
The US economy has been transitioning to a modestly better growth path due to strengthening in housing as well as continued strength in the auto industry. The Federal Reserve surprised the market at its last meeting by holding the line on their securities purchases in an indication that, while growth is improving, the Fed does not view the economy's growth path as robust. Neither do we.
This has been the weakest recovery since the depression in terms of job growth, income generation, and consumer confidence. And warning signs about the fragility of economic growth abound. For the first time since the late 1970s, in the midst of an expansion, 6-month-out income growth expectations are flat to negative. The only age group that has increased their labor force participation is the over-55 crowd. And Fannie Mae’s September National Housing Survey shows that 55 per cent of the public thinks the economy is heading the wrong direction while only 38 per cent of households think it is a good time to sell a house (roughly five out of eight Americans need to sell their home in order to buy a home).
This begs a number of questions. Could the government funding/debt ceiling debate set the economy back to recession? It’s possible, but not likely. Could it put house prices back on a declining path? Again, possible, but not likely. How does the Fed's decision to slow securities purchases play into this fiscal mix? It may make it easier for the Administration and Congress to put off serious fiscal restructuring by lowering the cost of debt to the government. How will the funding/debt ceiling standoff end? I don't know.
Douglas G. Duncan is Fannie Mae’s senior vice president and chief economist
