In the short term, the economy's headwinds are still restraining growth. They include:
— BUDGET FIGHTS
The heaviest millstone weighing down the economy is the rift between President Barack Obama and Republicans over taxes and spending.
Further talks are expected this spring as several deadlines arrive: Across-the-board spending cuts are set to kick in March 1. Financing to run the government will expire by March 27, raising the threat of a government shutdown. And the federal borrowing cap must be raised by May 18 or the government could default on its debt.
Haziness around future tax and budget policy may already be restraining growth. A report from the Federal Reserve last week suggested that some employers delayed hiring late last year because of uncertainty over the fiscal cliff.
— SLUGGISH HIRING
Job gains have held steady for the past two years at about 150,000 a month. That's only about enough to slowly reduce the unemployment rate, now at 7.8 percent.
Even in sectors that are recovering, many companies aren't yet adding jobs. Some are even cutting, especially in financial services. Bank of America, for example, has shed about 15,000 jobs in the past year.
In a robust recovery, monthly job gains are usually 250,000 or more. That's what it would take to rapidly reduce unemployment and force employers to raise pay to attract workers.
— FEW PAY RAISES
For now, high unemployment is limiting pay. When employers have lots of job applicants to choose from, they have little incentive to give raises.
Hourly wages rose just 2.1 percent last year, only slightly above consumer inflation, which was 1.7 percent. Consumer spending, which drives about 70 percent of the economy, can't improve much until pay or job growth accelerates. Americans still are still reluctant to run up credit card debt to pay for extra consumption.
A temporary Social Security tax cut expired this year, reducing Americans' take-home pay. It will cost a typical household making $50,000 a year about $1,000. A household with two high-paid workers will lose up to $4,500. The drop in pay could slow consumer spending.
The Social Security tax cut, in place for two years, was allowed to expire in the deal reached between the White House and Congress to avoid the fiscal cliff.
Most economists expect the higher Social Security tax to bite hardest in the first three months of the year. But after Americans adjust to the sudden cut, its impact should lessen over time.
If federal budget issues can be resolved, the economy could start to accelerate. Analysts forecast only modest growth this year of about 2 percent. But they think growth will strengthen as the year goes on.
JPMorgan Chase, for example, forecasts that the economy will grow at an anemic annual rate of just 1 percent in the January-March quarter. But as the drag from higher taxes fades and the debt ceiling is resolved, growth could pick up to a decent 3 percent pace by the October-December quarter.
Diane Swonk, chief economist at Mesirow Financial, expects housing and other tailwinds to accelerate growth this year — as long as budget "shenanigans" don't dampen consumer and business confidence as they did in 2011.
"Could we get 3.5 percent growth by the end of this year?" she asks. "If we can get over this budget stuff, absolutely."
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