Economists see less pain, slow gains in 2013

The economy will strengthen modestly over the next year — if the U.S. ducks double-barreled damage from Washington's budgetary indecision — according to USA TODAY's quarterly survey of economists.

Next year is likely to be one of slow gains from the deep recession that ended 3½ years ago, with low odds of a new recession, many say.

Almost two-thirds of the 48 economists surveyed predict the so-called fiscal cliff issue — the large spending cuts and tax hikes scheduled to kick in at year's end unless Congress acts — will be resolved without significant damage to the economy.

According to their median forecasts:

> The economy will grow 2.3% next year, up from an average of 1.65% in the first half of 2012, according to the median estimate of 48 economists. Growth of 3% or more is considered a healthy rate.

> The unemployment rate, now 7.8%, will end next year at 7.6%.

> By 2013's fourth quarter, the economy will be adding jobs at an average monthly rate of 175,000, compared with a forecast pace of 130,000 a month this quarter.

> Business investment growth, estimated at 4.2% in this quarter, will rise to 7.5% in next year's fourth quarter.

Federal Reserve policymakers provided a similarly cautious outlook in a statement following their two-day meeting Wednesday. It didn't scale back aggressive steps it took last month to stimulate the still-sputtering recovery.

To push down mortgage rates, Fed policymakers agreed to continue to buy $40 billion a month in mortgage-backed securities until the job market improves significantly. And they repeated that short-term interest rates will likely stay near zero until at least mid-2015.

Some economists say 2013's economy could grow perhaps half a percentage point more than they expect if not for the uncertainty created by Washington's stalemate over what to do about deficit-reduction issues. Going over the fiscal cliff could throw the U.S. into a recession, according to the Congressional Budget Office and private economists.

A majority believe Washington should take some measures to cut the deficit, but not all favor the same steps.

Nearly three-quarters of the economists believe Congress and the next president should let the 2010 payroll tax cut expire at year's end. About two-thirds think the Bush tax cuts should be extended, even for top-bracket taxpayers, despite President Obama's threat of a veto. Virtually the same proportion said an
increase in the top tax rate would be ``somewhat negative'' for job creation by small businesses, with 7% calling it ``very negative.''

"The recovery has weakened enough that it couldn't withstand the expiration of the Bush tax cuts,'' said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. ``A lot of small-business owners are in the top bracket, and that affects job creation.''

Letting the payroll tax cut lapse will stall the drop in the unemployment rate, said Mesirow Financial chief economist Diane Swonk.

"In the first half, the payroll tax is the difference between a falling rate or stagnant unemployment,'' she said. ``Then things will accelerate later in the year as housing improves and state and local government layoffs are less of a drag.''

Contributing: Paul Davidson

Survey Participants:

Dean Baker, Center for Economic and Policy Research
Bernard Baumohl, The Economic Outlook Group
Nariman Behravesh, IHS Global Insight
Tom Binnings, Summit Economics
Jay Brinkmann, Mortgage Bankers Association
Scott Brown, Raymond James
John Canally, LPL Financial
Bill Cheney, John Hancock Financial
David Crowe, National Association of Home Builders
J. Dewey Daane, Vanderbilt University
Rajeev Dhawan, Georgia State University
William Dunkelberg, National Federation of Independent Business
Robert Dye, Comerica Bank
Michael Englund, Action Economics
Ethan Harris, Bank of America Merrill Lynch
Maury Harris, UBS
Douglas Holtz-Eakin, American Action Forum
Hugh Johnson, Hugh Johnson Advisors
Jack Kleinhenz, National Retail Federation
Alan Levenson, T. Rowe Price
Dean Maki, Barclays
Ken Mayland, ClearView Economics
Dan Meckstroth, MAPI
Jim Meil, Eaton
Robert Mellman, J.P. Morgan
Richard Moody, Regions Financial Corp.
Donald Ratajczak, Morgan Keegan
Martin Regalia, U.S. Chamber of Commerce
Jeffrey Rosen, Briefing.com
Chris Rupkey, Bank of Tokyo-Mitsubishi UFJ
John Ryding, RDQ Economics
Joshua Shapiro, MFR
Robert Shrouds, DuPont
Allen Sinai, Decision Economics
James Smith, Parsec Financial
Sean Snaith, University of Central Florida
Sung Won Sohn, California State University
Neal Soss, Credit Suisse
Diane Swonk, Mesirow Financial
Carl Tannenbaum, Northern Trust
Robert Tipp, Prudential Fixed Income
Bart van Ark, The Conference Board
Chris Varvares, Macroeconomic Advisers
Mark Vitner, Wells Fargo
Brian Wesbury, First Trust Advisors
Lawrence Yun, National Association of Realtors
Mark Zandi, Moody's Analytics
Ellen Zentner, Nomura Securities