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Washington is standing in the way of US recovery

Monday, 9 Dec 2013 | 8:54 AM ET
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In order to defer the next debt crisis, Washington seeks still another timeout.

After the latest jobs report, U.S. markets soared. The Dow Jones climbed to 16,020, while Nasdaq roared to over 4,060 and even S&P 500 exceeded 1,800.

(Read more: What are U.S. stocks doing now? Click here for the latest market action.)

However, today only 52 percent of Americans are personally or jointly invested in the market — the lowest level since the 1990s. What drives the U.S. economy is consumption, which accounts for more than 70 percent of the GDP. And yet, retail spending over Thanksgiving weekend dropped for the first time in seven years.

The gap between Wall Street and Main Street remains deep.

Hollow optimism

The good news is that some 203,000 jobs were created in November. The bad news is that a robust recovery would require 200,000 to 300,000 new jobs per month. Further, there is uncertainty regarding data. Due to the government shutdown in October, job growth shrank sharply that month; November data may reflect a reverse trend.

Despite 45 months of private-sector job growth and half a decade of quantitative easing (QE), unemployment rate remains 7 percent. Meanwhile alternative unemployment, which includes both the unemployed and the under-employed, is still 13.2 percent.

The labor force participation rate, those aged 16 and over who are working or actively looking for work, remains 63 percent, the lowest since 1978. Meanwhile, the share of the population with a job has collapsed to 58.6 percent. America is not only aging — it's suffering from long-term unemployment.

In the absence of surprises, current policies might hold until the first quarter of 2014. Since the Federal Reserve may not consider hiking rates until unemployment rate plunges to 6.5 percent, or inflation hits 2.5 percent, lower rates could prevail until mid-decade.

(Read more: Job number good enough for taper—but not yet)

If any improvement in the labor-market indicators is to be sustained, economic growth should quicken. That, however, is not likely. The annualized growth is likely to remain around 1.6 percent in 2013 and, at best, around 2.5 to 3 percent in the medium-term — that is, if downside risks can be avoided (which will be challenging).

In view of the economic fundamentals, the current U.S. optimism is too much, too soon.

Kicking the can, yet again

What complicates projections is that the recent debt debacle is about to start anew. In mid-October, after the credit- rating agency Fitch put the U.S. on a "negative" ratings watch, Congress agreed on a deal to reopen the government. The government will be funded through Jan. 15, while the debt will be raised until Feb. 7.

Meanwhile, the House and Senate negotiators should reach accord on a sustainable, long-term blueprint for tax and spending policies over the next decade by Dec. 13. Recently, the stakes were further increased when the OECD warned that if the U.S. debt ceiling is not abolished, America could become the next threat to global growth, along with Europe and Japan.

Instead of a sustained solution, the bipartisan negotiators are setting up still another timeout. After the promising jobs report, both parties would like to replace an adverse standoff with the "first successful budget accord since 2011."

(Read more: DC budget deal takes shape as deadline looms)

In practice, the two parties have set aside the critical debt-reduction objectives, even though U.S. debt amounts to $17.3 trillion and U.S. total debt already exceeds $60.2 trillion.

Total interest for 2013 alone amounts to $2.6 trillion, which is more than all three largest budget items combined — that is, Medicare/Medicaid, social security, plus defense expenditures.

Elusive calm before new volatility

In both parties, the mainstream legislators seek compromise. Vocal and militant minorities are a different story, however.

Last October, Standard & Poor's came within hours of downgrading U.S. debt to its rock-bottom classification of "selective default." In the coming spring, Washington might run out of luck. The mid-term elections will be soon and the end of the Obama era is looming. A small minority of extremists in Congress hopes to pave way to the next government shutdown, debt ceiling confrontation and debt debacle crisis.

What we are witnessing an elusive calm before new volatility.

The euro zone remains at the edge of contraction, while unemployment continues to climb in the region. In Tokyo, the Abe administration's gamble can make or break Japan's economic future. In turn, U.S. recovery is vital to both Europe and Japan, which despair for American leadership.

In Beijing, Chinese leaders will seek to manage local debt challenges with subdued,though solid, growth. The last thing they need is another U.S. debt debacle. In the mainland, it would escalate the longstanding debate on the Chinese ownership of US Treasurys.

The U.S. economy is ready to recover, but a solid turnaround is not sustainable without credible, bipartisan cooperation over a medium-term debt/deficit plan. Today, Washington stands in the way of U.S. recovery.

(Read more: Economists a bit more upbeat about 2014)

Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). See also www.differencegroup.net.

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