ABA’s Economic Advisory Committee warns that debt ceiling debate, tax increases could harm economy

200px-American_Bankers_Association_LogoThe American Bankers Association’s Economic Advisory Committee recently warned that tax hikes, a prolonged debate over the debt ceiling and potential spending cuts in 2013 could result in economic downturn.

The committee said that while the private sector may enjoy sustainable growth, tax increases that took effect at the beginning of the year will drag down GDP growth by at least 1.25 percent, and more budget cuts could inhibit further growth.

“If you double down on austerity this year, you’re flirting with recession,” Scott Anderson, the chairman of the committee and chief economist at Bank of the West, said. “Resolving the debt ceiling and providing clarity on taxes and spending will boost confidence, opening the door to faster growth at a critical point in the economic expansion.”

The committee’s economists said that job creation is expected to decline in the first half of the year but added that unemployment will continue its steady decline to fall to 7.4 percent by year’s end. The committee also said that the housing market will see strong gains this year, as construction picks up and home sales continue to rise.

“Rising home prices creates a wealth effect that’s critical to supporting consumer spending and economic expansion,” Anderson said.

Additionally, the committee expects positive consumer spending growth but little improvement from last year’s growth rate. Consumer spending is expected to grow only 1.8 percent in 2013.

“We expect consumer spending to slow in the first half of this year as higher taxes reduce consumers’ take-home pay,” Anderson said. “Consumer spending will pick up in the second half of 2013 as housing activity and consumer confidence gain strength.”

While the committee expects an unexceptional rise in long-term interest rates, short-term interest rates will remain low throughout the year, due in part to the Federal Reserve’s monetary policy.  The committee also expects the federal deficit to continue its decline but remain at high levels.

“While budget deficits continue to fall, addressing the federal debt as a whole is still a work in progress,” Anderson said. “Much work needs to be done to reduce the federal deficit over the long term.”

The committee also expects consumer credit and business credit quality and availability to improve over the next six months.

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