Political standoffs in D.C. could impede economic growth in '15

The accelerating recovery could soon slow with new standoffs as Republicans take control of Congress

The economy boomed through most of last year, a time when the nation's capital was devoid of major budget fights and threats of government shutdown.

Economists worry, though, that the accelerating recovery could soon slow down with new standoffs in Washington as Republicans take control of Congress and President Obama shows no signs of backing down.

"It's almost a certainty that you're going to see some type of brinkmanship or saber-rattling," predicted Chris Krueger, a policy analyst at financial services firm Guggenheim Partners. "The quiet is over."

For the last year, Democrats and Republicans refrained from wrangling over the debt limit or pushing the nation to the edge of a "fiscal cliff" of tax hikes and spending cuts.

The relative political calm helped the economy post its strongest six-month stretch in more than a decade from spring through fall — including a gangbusters 5% annualized growth rate for the third quarter.

Consumer and business confidence soared.

For 10 straight months, the labor market has created more than 200,000 net new jobs, the best streak since the 1980s.

"There has been a pickup in economic growth in meaningful part due to the end of the political vitriol in Washington," said Mark Zandi, chief economist at Moody's Analytics.

In 2011, a bitter partisan battle over raising the debt limit led to the first-ever downgrade of the U.S. credit limit.

The following year, politicians went right to the edge of the so-called fiscal cliff of big tax increases and spending cuts before striking a deal to reduce their effect.

And in 2013, a stalemate over budget cuts led to a 16-day partial government shutdown that shaved 1.5 percentage points from what was then a persistently slow-growing economy, Zandi said.

But a bipartisan budget deal in late 2013 put Washington's long-running fiscal drama on hiatus.

Each of the political dust-ups coincided with dips in business and consumer confidence, which otherwise have improved steadily over several years, said Jeffrey Zients, director of the White House's National Economic Council.

"These self-inflicted wounds have a real impact on the economy," he said. "In the last year or so, we haven't had any."

A key measure of consumer confidence from the University of Michigan and Thomson Reuters rose steadily through 2014 and in December hit its highest level since early 2007. The same thing happened with the small-business optimism index from the National Federation of Independent Business.

Another monthly business confidence measure, taken by Moody's Analytics since 2003, hit a record high in December.

AT&T Inc. Chief Executive Randall L. Stephenson recently emphasized how political upheaval can put the brakes on corporate investment.

"We're all in the middle of putting our business plans together for 2015," he told reporters in early December. "Uncertainty in general just has a huge impact on how you think about the future and how you plan for the future, how you plan for capital investment, how you plan for hiring."

At the time, Congress was considering last-minute extensions of key business tax breaks and a budget bill to keep the government funded through the fiscal year ending Sept. 30.

Lawmakers passed both bills. But there were signs of trouble heading into the new year.

Many Democrats objected to a provision in the budget bill that eased new regulations on complex financial derivatives. They almost derailed House passage of the budget bill.

Meanwhile, Republicans — angered at President Obama's executive action on immigration — limited funding for the Department of Homeland Security by extending it only through February.

That sets up one of several key fiscal deadlines next year that could lead to partisan standoffs.

The biggest comes March 15, when a suspension of the nation's debt limit expires. The Treasury Department probably will be able to put off the need to raise the limit for a few months, but Republicans could try to use it to get budget cuts or other concessions from Obama.

The 2011 debt limit fight caused consumer and business confidence to plummet.

Political analysts said the Republican-led standoff, which risked a federal government default on the national debt, hurt the party's image. There hasn't been another major debt limit battle since then.

After big Republican wins at the polls in November, incoming Senate Majority Leader Mitch McConnell (R-Ky.) vowed "there will be no government shutdowns and no default on the national debt."

House Speaker John Boehner (R-Ohio) has made similar promises.

Sen. Amy Klobuchar (D-Minn.), vice chairwoman of the Joint Economic Committee, said she was hopeful that future standoffs could be avoided.

"I have continued to take the Republican leadership at their word," she said.

But Rep. Tom Price (R-Ga.), who will be the new chairman of the House Budget Committee, indicated recently that he might use the debt limit to get spending cuts from the White House.

Potential "crisis moments" involving issues such as the debt limit can be "opportunities and pinch points to get good policy," he told reporters recently.

Krueger at Guggenheim Partners said the debt limit looms as "the biggest leverage point" for Republicans. And they're more likely to fight after Obama fueled their ire with his recent executive actions on immigration and easing of relations with Cuba.

"Leaders in the House and Senate understand the economic stakes, but at the end of the day you have the backbenchers," Krueger said, "and they're angry."

jim.puzzanghera@latimes.com

Times staff writer Lisa Mascaro contributed to this report.

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