By Vicki Needham - 01/06/13 11:00 AM EST
A robust labor market recovery this year is dependent on Congress and the White House successfully resolving major budget issues within the next couple months.
Economists and business groups say the job market, which continued improving during months of tense talks over the so-called "fiscal cliff," faces a jolt if policymakers can't clear a looming trio of budgetary hurdles.
"I think we really are playing with dynamite with the debt ceiling," Alan Krueger, chairman of the White House Council of Economic Advisers said during an interview on MSNBC.
"Just go back to August 2011, we saw confidence plunge when Congress played Russian roulette with the debt ceiling," he said.
"We saw job growth grind to almost a halt. So the economy will certainly do better if Congress does what it normally does, which is raise the debt ceiling without drama."
The economy added 155,000 jobs in December, roughly the average for monthly gains made in the past two years, reflecting an uncanny ability to hang tough despite those tax and spending cut headwinds.
Now the jobs market and employers face their next challenge.
"I don't expect an improvement in the job market until after Washington settles on what spending cuts and tax reform will be done, if any, and raises the Treasury debt ceiling," said Mark Zandi, chief economist for Moody's Analytics.
"The uncertainty created by the coming political battles will continue to limit any gains in the job market or economy.
"However, the economy is raring to go, and if policymakers could simply get things reasonably together, it would be off and running," Zandi said.
Congress cleared the "fiscal-cliff" package on New Year's Day and President Obama signed it on Wednesday. The deal extends tax rates on annual household incomes under $450,000 and postpones a portion of the scheduled $109 billion automatic spending cuts for two months.
"Some of the uncertainties in the economy have been removed with the fiscal cliff agreement, but Congress failed to address the debt and deficit issues which will still be a drag on the economy," said Chad Moutray, chief economist at the National Association of Manufacturers, in a blog post.
"If Washington is able to tackle some of the country’s difficult fiscal issues this will lead to the manufacturing sector returning to the outsized contributions that we saw earlier in the year," he said.
Business leaders had pressed Congress and the White House to reach a broader deal that included entitlement reforms.
Martin Regalia, chief economist for the U.S. Chamber of Commerce, said the “administration and Congress must work to address our long-term fiscal problems through tax and entitlement reform, and by getting our debt and deficits under control.”
Meanwhile, congressional Republicans are promising the White House another battle over the debt ceiling with a vow to extract spending cuts and changes to entitlement programs.
"We are still in a fragile recovery, however, and the prospect of further spending cuts remains the biggest threat to robust growth," said David Madland, senior fellow at the Center for American Progress.
The president and Democrats have said that while budget cinching is necessary it doesn't need to push the government to the brink of a shutdown.
But Sen. John CornynJohn CornynHow the White House got rolled on the Saudi-9/11 bill GOP leaders express reservations a day after 9/11 veto override McConnell opens door to changing 9/11 bill MORE (R-Texas) argued in a Houston Chronicle op-ed that a partial government shutdown could "restore fiscal sanity."
With the economy trudging along, it is clear that an agreement among congressional leaders and the president will bolster economic growth and help create the millions of jobs economists expect in the next few years.
"What we can see from recent history is that when Congress acts in a bipartisan way it has a beneficial effect for the economy. When we have trench warfare that creates a lot of uncertainty it slows economic growth," Krueger said.