Economic Forecasts Reduced for Second Half of Year, But Upcoming Election Will Reduce Some Business Uncertainty

The outlook for the US economy and labor markets is weaker for the third and fourth quarters this year than it was just three months ago, according to a quarterly survey of professional economists conducted by the Federal Reserve Bank of Philadelphia this month.

However, with the presidential election coming up in less than three months, some of the uncertainty surrounding government tax, debt and spending policies may be reduced after Nov. 6, with at least the possibility of a more positive outlook.

The quarterly projected GDP growth figures are now 1.6% and 2.2% on an annual rate basis for the third and fourth quarters of 2012, vs. 2.5% and 2.6%, respectively, projected in May. 

The forecasters also cut their forecasts for the first two quarters of next year as well, to 1.8% and 2.3%, vs. 2.6% and 2.7%, respectively, three months ago, according to a posting on The Wall Street Journal's website on Friday.

Slower hiring and therefore a continued national unemployment rate above 8% through the second quarter of 2013 were also forecast by the survey.

Inflation, however, will remain under control for the foreseeable future, the survey indicates.

These results highlight the dilemma facing the federal government in its efforts to ratchet up economic activity. Recent indications that businesses are holding back on hiring and investing demonstrate the uncertainty with which they are approaching their business prospects over the next 12-18 months. At the same time, there has been some evidence that US manufacturing activity has picked up in certain sectors, that our exports are picking up, and that our trade deficit is narrowing.

The stalemate in Washington on debt, spending and tax policies has not helped the economic climate. Many business owners have said that the uncertainty surrounding the upcoming presidential election is another element that is holding them back from making longer-term commitments.

The outcome of the election is certainly in doubt at this point, with President Obama's economic record considered to be less than stellar but many voters also wary of Mitt Romney's approach to tax policy and entitlement reform.

When the election is over, some of the uncertainty will be reduced, and perhaps businesses will re-evaluate their positions on hiring and spending -- at least that's what we're hoping for.