Economist Zandi sees more moderate effects of spending sequester

Moody’s Analytics economist Mark Zandi on Thursday predicted that the economy would grow at about 2 percent in 2013, a slightly rosier projection that the 1.4 percent growth predicted by the Congressional Budget Office in its report this week.

Both Zandi and the CBO see the economy being hurt by $85 billion in cuts slated to take effect on March 1 and by the tax increases, including the higher payroll tax, that went into effect in January.

Whereas CBO sees the economy taking a 1.5 percent hit, Zandi sees a 1.3 percent reduction to an underlying growth number that is slightly higher. 

“The economy’s resilience is comforting given the mounting weight on growth from fiscal austerity,” he said in the Thursday report. “ It is important to note that the fiscal drag from federal, state and local government in 2012 was just under a percentage point, and the economy still grew about 2 percent.”

Zandi said the end of the two-year 2 percentage point payroll tax holiday appears to be affecting consumer behavior.

“Judging by the recent slide in consumer confidence, households were surprised by their smaller paychecks. Retailers are sure to feel the fallout soon,” he wrote. 

After 2013, Zandi foresees a strong rebound as the economy adjusts to the looming budget cuts, which are slated to continue for the next eight years, and as the Federal Reserve continues an easy money policy. 

“Fiscal austerity ensures the economy will struggle in coming months, but monetary stimulus ensures that it will continue to grow,” he said. “Growth will accelerate to near 3 percent during the second half and approach 4 percent in 2014-15.”

He predicts unemployment falling from 7.9 percent to 6 percent by 2016, ahead of the next presidential election.

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