S&P: US economy can weather short sequester storm

The United States economy can weather the drastic spending cuts known as the sequester if they are short-lived, ratings firm Standard & Poor's said Friday. S&P said the cuts, as well as a potential government shutdown at the end of March due to the budget fight, "could have far-reaching, although probably shallow, effects on the US economy and its prospects for a strengthening recovery." The across-the-board $85 billion in spending cuts over the next seven months were scheduled to take effect Friday unless President Barack Obama and Republican lawmakers struck an unlikely last-ditch deal. The entrenched political gridlock in Washington over budget deficit reduction and the uncertainty it has generated remained the biggest threats to the US economic recovery, S&P said. The ratings firm said it had long assumed that the sequester cuts would take place, but it believed they would be temporary and replaced in the second quarter by a long-term package of spending cuts and tax increases. "If this proves true, we think the sequester would still likely have only a mild downside effect on GDP growth this year," the company said. "If sequestration were to persist for the rest of the year, which we view as unlikely, we would trim our 2013 growth forecast by about half a percentage point." The Obama administration also estimated the economy, which barely grew in the 2012 fourth quarter, would take a 0.5 percentage point hit in 2013 if the cuts are fully implemented. S&P projected if the sequester was not modified, it would bring annual growth down to about 2.0 percent, below its current forecast of 2.7 percent. It estimated the risk of the United States falling back into recession between 10 percent and 15 percent, lower than the 15-20 percent chance the economy will make a quick turnaround. S&P expressed concern about the March 27 expiry of government funding under the stopgap "continuing resolution", a substitute for a full formal budget. If Congress fails to extend the current continuing resolution, the government would be forced to shut down services it deemed nonessential. S&P calculated that each week of a shutdown would trim 0.2 percentage points from growth. "The good news is that if Washington works through a deal fairly quickly, the underlying momentum in the US economy would help it withstand these drags on growth," it said. S&P made no mention of another US credit rating downgrade in the statement. In August 2011, it stripped the United States of its coveted AAA rating, citing the bitter political battle over raising the country's borrowing limit that was pushing the world's biggest economy to the brink of default. The agreement in Congress to raise the debt ceiling spawned the sequester spending cuts, designed to be so drastic they would push the Democrats and Republicans to find a budget deficit-reduction compromise to avert them.