The US economy would enjoy a short-term boost with up to 1.6 million jobs added if Congress were to cancel more than US$100 billion in upcoming automatic spending cuts required of the federal government, the Congressional Budget Office (CBO) estimated on Thursday.
Earlier this year, Congress failed to negotiate a deal to either repeal US$1.2 trillion in across-the-board spending cuts over 10 years or substitute them with more targeted government savings.
The CBO, in a letter to Representative Chris Van Hollen, the senior Democrat on the House Budget Committee who requested the study, said canceling the spending cuts scheduled for next month through September next year, would increase US economic activity by 0.7 percent in the third quarter of next year, the end of that fiscal year.
Employment would be 300,000 to 1.6 million higher by reversing the spending reductions than under current law, the CBO said.
The report came after the latest data showed new claims for jobless benefits increased 7,000 to 343,000 last week, but remained within a range that suggests the labor market’s recovery is on track.
“While we’ve made important economic progress in the last few years, it is indefensible that Congress would impose self-inflicted wounds on our still-recovering economy, especially while so many families are still struggling to make ends meet,” Van Hollen said in reaction to the CBO report.
The national unemployment rate is currently 7.6 percent.
However, the CBO, a non-partisan agency that analyzes the fiscal and economic impact of legislation, also warned that over the long-term, reversing the spending cuts on domestic and military programs “would lead to greater federal debt, which would eventually reduce the nation’s output.”
Leading Republicans have defended the steep, indiscriminate spending cuts as necessary for slowing federal budget deficits and a national debt that is now at nearly US$16.9 trillion and climbing.
While higher taxes and deep government spending cuts have dampened economic activity in the first half of the year, the drag appears to be fading.
A gauge of planned US business spending on capital goods rose last month, buoying hopes of an acceleration in economic growth in the second half of the year.
The data on Thursday was the latest to suggest factory activity was regaining some momentum after hitting a soft patch earlier this year and it fit in with views that the drag on the economy from tighter fiscal policy was ebbing.
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.7 percent last month, the Commerce Department said. May’s gain was also revised higher, to 2.2 percent from 1.5 percent.
“That seems to portend an increase in capex as we roll into the third quarter and suggests that third-quarter growth is going to pick-up,” said Jacob Oubina, senior US economist at RBC Capital Markets in New York.
However, shipments of these so-called core capital goods - used to calculate equipment and software spending in the GDP report, fell 0.9 percent last month. The drop, which followed a 1.9 percent increase in May, was a reminder of just how much economic growth in the second quarter slowed.
Forecasting firm Macroeconomic Advisers cut its projection for second quarter GDP growth by two-tenths of a percentage point to a 0.5 percent annual rate on the weak shipments number. JPMorgan also lowered its forecast to 0.5 percent.