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Business & Technology

Expert: Political uncertainty killing economic activity

July 31st, 2011 10:20 pm by Kate Prahlad

No one is sure what will happen if Congress fails to make a deal on raising the nation’s $14.3 trillion debt ceiling, but local economist Steb Hipple is sure of one thing.
“This has never happened before in a high income civilized nation,” Hipple said. “No one knows what will happen, but it’s not going to be good.”
Small businesses seem to share that sentiment, according to a recent poll by the National Federation of Independent Business.
Its “Small-Business Optimism Index” dropped 0.1 percent in June to 90.8, “an unsurprising reading, basically unchanged from the previous month and solidly in recession territory,” according to the NFIB.
Pessimism about future business conditions and expected real sales gains brought the index down for the fourth consecutive month, the NFIB said.
According to the report, “69 percent of the owners view the current period as a poor time to expand and 75 percent of those blame the weak economy for their outlook, while 10 percent cite the political uncertainty.”
There is another thing Hipple is certain about — that uncertainty is killing economic activity.
The doubt is causing businesses to hold on to their money, making little in the way of investments, capital expenditures, or hirings, which slows the economy’s growth.
Only about 50 percent of the small businesses surveyed by the NFIB reported making any capital expenditures, a level referred to as a “historically low average” in the report.
One of Hipple’s fear is that a default, even self-imposed, would push the economy into a slower growth track, if any growth is occurring at all.
“If the U.S. is in economic decline, this will accelerate the process,” Hipple said.
There’s evidence a recovery slowdown is already happening.
The Commerce Department reported Friday that output increased at a 1.3 percent annual pace in the second quarter, below the 1.6 percent rate that was expected.
Meanwhile, the government released the downwardly revised first quarter GDP, saying in the first three months of the year, the economy inched higher just 0.4 percent. The initially reported number was 1.9 percent.
Many other monthly indicators are scheduled to come at the end of July and early August, and economists are watching closely.
“Most economists are aghast at what’s going on,” Hipple said. “We’re seeing the second dip in the most severe recession since the 1930s, and we should be talking about additional fiscal stimulus. Instead, whatever they do, they will be reducing the level of fiscal stimulus we currently have.”
Hipple likened the logic to putting out a fire by pouring gasoline on it and said the politicians inside the Beltway are disconnected from what’s happening on Main Street.
“Most countries default when they don’t have enough money to pay their debts,” he said. “Our default will be self-imposed. That’s an outrage.”
The NFIB’s report indicated small businesses feel the same.
“Small-business owners are registering a vote of ‘no confidence’ in the federal government,” said NFIB Chief Economist Bill Dunkelberg. “Between the deluge of new regulations and a Washington policy agenda that is largely ignorant of Main Street needs, stubbornly low consumer spending, and grave concern among small firms about the federal budget, there is not much to be optimistic about as a small-business owner. Who can blame the prevalence of pessimism when administration officials are telling Congress that small businesses need to pay more in taxes to support government spending programs?”

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