“Both the housing market and the banking sector have healed significantly,” he said.
HOME SALES
Residential real estate, which collapsed and helped trigger the 18-month economic downturn that ended in June 2009, is picking up. Existing homes sold at their strongest pace in more than two years in November and building permits reached a four- year high. Companies including Toll Brothers Inc. and KB Home are competing for buildable lots and raising prices.
“We’ve seen a virtuous cycle building in housing,” said Terry Sheehan, an economic analyst at Stone & McCarthy Research in Princeton, New Jersey.
Banks are bouncing back as well, with profits in the third quarter the highest in six years, according to the Federal Deposit Insurance Corp. in Washington.
The number of lenders on FDIC’s confidential list of so- called problem banks -- those deemed to be at greater risk of collapse -- fell from 732 in the second quarter to 694 in the third, the smallest number since a peak of 888 after the financial crisis.
ENCOURAGING SIGN
Another encouraging sign: The job market has held up even in the face of concerns about the possibility of higher taxes and government spending cuts in 2013. Payroll gains this year through November averaged about 151,000 a month compared with 147,000 in the same period of 2011.
Labor Department figures due Jan. 4 may show employers added 150,000 jobs in December, about the same pace as the prior month, according to the median forecast of economists surveyed by Bloomberg.
“Underneath the fiscal drama is an improving economy,” said Ryan Sweet, a senior economist at Moody’s Analytics. “The fiscal drag will take some wind out of it but once there is more clarity, we can expect stronger growth.”
The budget deal struck by the White House and Senate Republican leaders, if it becomes law, probably would slow the U.S. economic recovery without stopping it.
The elimination of a 2 percent payroll tax cut, coupled with higher income taxes on the wealthy, will help reduce growth in the first quarter to 1 percent, from 3.1 percent in 2012’s third quarter, the latest data available, according to economists at JPMorgan Chase & Co. and Bank of America Corp. The expansion will strengthen later in the year as the housing market continues to rebound, they forecast.
“It’s going to definitely present a headwind for the economy,” Michael Feroli, chief U.S. economist for JPMorgan Chase in New York, said of the fiscal pact that the Senate planned to vote on early today. “We’re looking for a downdraft in growth in the first half of the year, with the economy coming back in the second.”
The first half slowdown will mean that the U.S. will make limited progress in reducing unemployment in 2013, according to projections by Ethan Harris, co-head of global economic research for Bank of America in New York. He sees the jobless rate falling to 7.5 percent in the fourth quarter of 2013 from 7.7 percent in November 2012.
The agreement forged in talks between Vice President Joe Biden and Senate Minority Leader Mitch McConnell, a Kentucky Republican, would avert some, though not all, of more than $600 billion in automatic tax increases and spending cuts slated to take effect this year. Under the accord, households making less than $450,000 per year would be spared an income tax rate increase. And the unemployed would still be eligible for extended jobless benefits.
Payroll Taxes
Payroll taxes would rise, to 6.2 percent from 4.2 percent last year. And the wealthy would see an increase in their top income tax rate, to 39.6 percent, from 35 percent.
The deal faces an uncertain fate in the Republican- controlled House of Representatives. House Speaker John Boehner of Ohio said last night he would bring any budget legislation passed by the Senate to the House floor.
Even if the measure is passed by the House, the agreement won’t mean the end of budget brinksmanship, Andrew Laperriere, senior managing director for ISI Group in Washington, said in a report yesterday to clients.
The U.S. has hit its $16.4 trillion debt limit, forcing the Treasury Department to take what it called “extraordinary measures” to keep funding the government for now.
Another Confrontation
The Treasury probably will exhaust such measures by late February or early March, setting up another confrontation between President Barack Obama and congressional Republicans, according to Laperriere, who spent eight years working on Capitol Hill before joining ISI in 1999.
Bloomberg
