Washington is about to kill the economy

Believe it or not, but we’re in the midst of a growth re-acceleration. At least, we were.

The latest data suggests that factories were spooling up in August. Business confidence was climbing. New orders poured in. All else equal, we’re on the cusp of a surge in the economy on a scale not seen since 2011.

But, of course, all else isn’t equal,

because we’re hours away from a likely government shutdown in Washington. And even if a last-minute deal is brokered fiscal-cliff style, we’re just a few weeks away from running against the debt ceiling.

It’s something of a national pastime to blame the politicians for ruining things. In this instance, at least, it’s actually true.

Consider that the Citigroup Economic Surprise Index — which measures how economic data is performing vs. Wall Street’s estimates — has returned to heights not seen since late last year; a marked reversal from the weakness suffered earlier this year as fourth-quarter-2012 and first-quarter-2013 GDP growth averaged just 0.6% and caused a growth scare.

Both manufacturing and non-manufacturing ISM business activity surveys have surged on a scale not seen since 2003 — a period that featured an annual GDP growth rate of nearly 6% vs. the 1.6% rate we’ve averaged over the last four quarters.

Today, both the Chicago PMI and the Dallas Fed manufacturing survey surprised to the upside on a surge of new production.

So the corporate sector seems to be feeling pretty good.

This was corroborated by last week’s Richmond Federal Reserve manufacturing activity survey. While the overall report was a bit of a disappointment (missing expectations on a drop in shipments and hiring) something startling was hidden deep in the details of the report: Spending intentions on capital expenditures surged to +31 in September from +15 in August, reaching 13-year highs.

This is a big deal because a lack of corporate investment — and the accompanying fall in labor productivity and fixed-capital formation — has been one of the main reasons the economy has been so lackluster to date.

And what’s infuriating is that right when we’re on the verge of seeing a real turnaround, Washington’s fiscal fracas threatens to undo it all.

How bad could the damage be?

Over the last four quarters, the economy has only managed a 1.6% annual GDP growth rate (although the most recent second-quarter-2013 number was better). According to Bank of America Merrill Lynch economists, a month-long government shutdown could lop 2% from fourth-quarter-2013 GDP growth. That’s right: If the government’s lights go out for just four-weeks, the impact to incomes and confidence could cause the economy could shrink outright over the next three months.

The bigger risk, in their mind, is the debt ceiling.

If that’s not resolved by Oct. 17, 20% of federal spending worth 4% of GDP will be immediately cut. Moreover, this could be accompanied by a debt default and credit downgrades — threatening an even more violent experience than what we saw in August 2011.

Back then, stocks fell nearly 20%.

Πηγή: MarketWatch - By Anthony Mirhaydari

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