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Goldman, Moody’s Say Obama Plan Would Boost GDP as Much as 2%

U.S. President Barack Obama
U.S. President Barack Obama pauses while making a speech to a joint session of Congress at the Capitol in Washington, D.C. on Sept. 8, 2011. Photographer: Kevin Lamarque/Pool via Bloomberg

The U.S. economy would get a boost of up to 2 percent under President Barack Obama’s $447 billion jobs plan, say economists at Goldman Sachs Group Inc., Moody’s Analytics Inc. and JPMorgan Chase & Co.

“The U.S. is on the cusp of a recession,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “The plan would go a long way toward stabilizing confidence, forestalling another recession and jump-starting a self-sustaining economic expansion.”

The proposal, which would raise infrastructure spending and cut in half payroll taxes paid by workers and small businesses, would add 2 percent to next year’s GDP, create 1.9 million jobs and lower the unemployment rate by one percentage point compared with current policy, Zandi said.

Obama announced his plan to a joint session of Congress a week after a government report showed that hiring unexpectedly stalled in August, raising concern the recovery was grinding to a halt. Unemployment has hovered at about 9 percent or more for two years, damping consumer spending.

Tax cuts account for more than half the dollar value of the plan, which includes a $105 billion in infrastructure spending for school modernization, transportation projects and rehabilitation of vacant properties. The proposal includes $35 billion in direct aid to state and local governments to stem layoffs of educators and emergency personnel, according to a White House fact sheet.

Unemployment Benefits

A reduction in government spending and the end of the payroll-tax holiday and an expiration of extended unemployment benefits would have cut GDP by 1.7 percent in 2012, according to JPMorgan chief U.S. economist Michael Feroli. Instead, the Obama proposal more than makes up for that potential loss and may add a net 0.1 percent to the economy, he estimates.

“It offsets what would otherwise have been a huge drag from the fiscal restraint” that was due next year, he said. “The plan reduces the risk of a recession in 2012, though it doesn’t do much for growth in the second half of this year.”

Goldman Sachs estimated the plan would add 1.5 percent to the economy, while Macroeconomic Advisers LLC said 1.3 percent and UniCredit Research, up to 2 percent.

“This plan would reduce the odds of a recession to very low levels,” said Joel Prakken, senior managing director of Macroeconomic Advisers in St. Louis, which estimated it would add 1.3 million jobs next year. “The biggest immediate boost is from consumer spending from the payroll-tax holiday and extension of unemployment benefits. If people get more income, they will spend it.”

Stocks, Treasuries

Stocks sank and 10-year Treasury yields fell to a record yesterday as concern grew about Greece’s debt crisis. The Standard & Poor’s 500 Index dropped 2.7 percent and has declined 15 percent since July 7. Ten-year Treasury yields slid as low as 1.89 percent. They have plunged from 3.18 percent in July amid signs of a slowing economy.

Public opinion of Obama as well as Congress has plummeted to new lows since a partisan fight in July and August over raising the government’s debt limit that took the country to the edge of default.

Obama’s monthly job-approval rating in a Gallup Poll dropped to the lowest of his presidency, with 41 percent of U.S. adults saying they approved of his overall performance.

Some economists were less impressed with his proposals. With time running out for any measures to be felt before next year’s election, limited options for providing a short-term stimulus, and Republicans resisting more spending, Obama opted for ideas that have already won a measure of bipartisan support.

‘Pedestrian Package’

“It looks like an amalgam of things we’ve already seen,” said Stephen Stanley, chief economist at Stamford, Connecticut-based Pierpont Securities LLC. “I don’t know why you would demand a joint session of Congress to deliver such a pedestrian package.”

The Obama plan may result in less consumer spending than expected because people may save tax cuts, said Harvard University economics professor Martin Feldstein, in an interview on Bloomberg Television “Surveillance Midday” with Tom Keene.

“People are too nervous, they are paying down debt, they are not going out and going to spend it,” said Feldstein, who served as chief economic adviser to President Ronald Reagan. “Until we fix the housing program, it is hard to see how consumers are going to have confidence, net worth and the willingness to spend.”

Forecasts Cut

The U.S. economy will expand at a 1.6 percent rate in 2011 and 2.2 percent in 2012, according to the median forecasts of 63 economists surveyed Sept. 2 to Sept. 7 by Bloomberg News. The median forecast has been cut from 1.7 percent and 2.4 percent a month earlier. Economists have raised the odds of a recession to 35 percent.

The unemployment rate has averaged 9.5 percent the past two years, and recent reports have shown manufacturing is slowing, consumer confidence and home values are sliding. Bond prices are climbing as investors shun stocks for safer fixed-income securities.

“A substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring,” Federal Reserve Chairman Ben S. Bernanke said in a Minneapolis speech this week. While Congress needs to put spending on a sustainable path over the long run, “fiscal policy makers should not as a consequence disregard the fragility of the economic recovery.”

Hiring has been hurt by a decline in government payrolls this year, with federal, state and local agencies cutting 17,000 jobs last month and 37,000 in July.

‘Significant Dent’

The Obama plan “is a collection of stuff that collectively could probably make a significant dent in unemployment, not huge, but it would make a noticeable difference in the economy,” Nobel Prize-winning economist Paul Krugman said in a Bloomberg News interview in Yaroslavl, central Russia.

Government spending contributed a combined 1.1 percentage points to growth from 2008 to 2010, as the economy overall expanded 0.3 percent, according to the Bureau of Economic Analysis. Zandi said growth was supported by Obama’s stimulus package, which has been criticized by House Republicans as ineffective.

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