Economy Watch: Supercommittee Set to Be a Dud

The supercommittee looks like it won't have an answer to the debt question by Thanksgiving. The U.S. economy is trending upward, ever so slightly. And the federal government will have funding at least through Dec. 16.

November 21, 2011
By Dees Stribling, Contributing Editor

Senator John Kerry of the supercomittee

The Thanksgiving deadline is near for a deal from the Congressional “supercommittee” – formally called the Joint Select Committee on Deficit Reduction – to cut $1.2 trillion from the federal deficit over 10 years, and it looks like the committee is going to give the nation a turkey for the holiday. At least that’s a reasonable impression considering that opposing members of the committee were on television on Sunday blaming the impasse on each other. However predictable such a situation might be, it doesn’t make the end result more palatable.

What will the consequences of supercommittee failure be? Maybe not that much, except for spooking an easily spooked stock market for a day or two. If the “automatic” cuts – called “sequestration” in legislative argot – happen as planned, the Congressional Budget Office estimates that they would cut non-Medicare domestic spending by 7.2 percent, while Medicare would drop by 2 percent. Defense spending would be cut by about 10 percent. That sounds like a meat-cleaver approach that would cause some economic dislocation.

But in fact the cuts are only theoretical. The “automatic” budget cuts that are supposed to happen if the committee doesn’t pull a bipartisan rabbit out of its hat don’t actually start until January 2013, which is an eon or two away in Congressional terms. After the failure of the not-so-supercommittee, it seems, Congress will turn its attention to undoing the automatic cuts. Of course, Congress is, like the committee, divided and dysfunctional, and next year’s an election year to boot, so the budget morass remains as murky as ever, something the rating agencies might take note of next year.

Leading Indicators See Uptick

The U.S. economy is still saying “what, me worry?” about Europe, it seems. The Conference Board reported on Friday that its Leading Economic Index increased 0.9 percent in October to 117.4, following an anemic 0.1 percent increase in September, and a modest 0.3 percent increase in August (the hard-to-remember pre-recession year 2004 = 100). Thus October represented an unexpectedly sizable uptick.

The October index rebound, according to the Conference Board, was largely due to the sharp pick-up in housing permits, and possibly even suggests that the risk of an economic downturn, the dreaded double-dip, has receded. Improving consumer expectations, stock markets, and relatively good labor market indicators also contributed to the upward movement in the index.

“The [index] is pointing to continued growth this winter, possibly even gaining a little momentum by spring,” said Ken Goldstein, an economist at the Conference Board, in a statement. “As long as it lasts, there is a glimmer of hope. The lack of confidence has been the biggest obstacle in generating forward momentum, domestically or globally.”

Congress Funds Government Through Dec. 16, FHA Mortgage Limits Restored

Whatever the supercommittee does, it seems that Congress isn’t completely dysfunctional, despite indications to the contrary. Last week Congress passed a bill – with votes from both parties – to fund the government through Dec. 16. Otherwise, funding would have run out on Saturday. The measure, signed by President Obama over the weekend, was a continuing resolution, or “minibus” in Congressional argot, since Congress has yet to actually pass a budget for the fiscal year that began in October.

Other bills funding other parts of the government were also passed with the minibus. Tucked away in the package of legislation was a provision that warmed the hearts of the National Association of Home Builders, because it increased the mortgage amount that the FHA can insure to back to a sizable $729,750. In October, that ceiling had dropped to $625,000.

On Friday, Wall Street bounced around like a seismometer needle during a tremor, eventually ending mixed. The Dow Jones Industrial Average ended up 25.43 points, or 0.22 percent. The S&P 500 lost a scant 0.04 percent, while the Nasdaq was down 0.6 percent.

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