Both factors could reduce overall spending.
On Friday, about $85 billion in automatic spending cuts are to kick in, and there’s little sign that the White House and Congress will reach a budget deal to avoid them. The cuts will cause furloughs and temporary layoffs of government workers and contractors and sharply reduce spending on defense and domestic programs.
For about 2 million long-term unemployed, benefits now averaging $300 a week could shrink by about $30. Payments that subsidize clean energy, school construction and state and local public works projects could be cut. Low-income Americans seeking heating or housing aid might face longer waits.
Overall, the tax increases and spending cuts could shave up to 1.2 percentage points from growth this year, economists estimate. Alexander estimates that without the spending cuts or tax increases, the economy would expand more than 3 percent this year. Instead, he predicts growth of only 2 percent.
But growth should accelerate later this year as the effects of the government cutbacks ease, he and other economists say. And several reports Tuesday suggest that the economy’s underlying health is improving despite the prospect of lower government spending and further budget stalemates:
- The Standard & Poor’s/Case-Shiller 20-city home price index rose 6.8 percent in December from a year earlier. That was the biggest year-over-year increase since July 2006. Rising home prices tend to make homeowners feel wealthier and encourage more spending. They also cause more people to buy before prices rise further. And banks are more likely to provide mortgages if they foresee higher home prices.
- Consumer confidence rose after three months of declines, according to the Conference Board, a business research group. Confidence had plunged in January after higher taxes cut most Americans’ take-home pay. The rebound, though, suggests that some consumers have begun to adjust to smaller paychecks. The consumer confidence index rose to 69.6 in February from 58.4 in January. That’s higher than last year’s average of 67.1.
- Bank lending rose 1.7 percent in the October-December quarter, the Federal Deposit Insurance Corp. said. It was the sixth rise in seven quarters. Banks made more commercial and industrial loans to businesses and auto loans to consumers. More lending means the Federal Reserve’s policy of keeping interest rates at record lows will benefit more people. Chairman Ben Bernanke reiterated to Congress on Tuesday that the Fed’s efforts are helping the economy and signaled that they will continue.
- Sales of new homes rose to a seasonally adjusted annual rate of 437,000, the Commerce Department said. That’s the highest level since July 2008. The gain will likely encourage more construction. Higher sales are keeping the supply of new homes low, even as builders have tried to keep up. At the current sales pace, it would take only 4.1 months to exhaust the supply of new homes for sale. That’s the lowest such figure in nearly eight years.
“Builders are not putting up homes fast enough to meet underlying demand,” said Patrick Newport, an economist at IHS Global Insight.
New homes have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the National Association of Homebuilders.
Construction hiring has picked up in recent months. The industry has gained 98,000 jobs since September, its best stretch since the spring of 2006 — before the housing bubble burst.