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Economic Pain Will Peak This Summer: Mark Zandi

Daily Ticker

The Dow and S&P 500 seem unstoppable, reaching high after high. Jobs are slowly but surely coming back, and some estimate that the first quarter GDP will be as high as 4%. So far, 2013 has been good to the U.S. economy, but that might be about to change.

March headline retail sales show a decline of 0.4%, and the March savings rate fell to 2.6%

Mark Zandi, American economist and co-founder of Moody’s Economy.com, tells the Daily Ticker that we’re in for a spring swoon. “Growth will be slow in the second and third quarters,” he says. “I think we’ll be lucky to hit 2% GDP growth in these quarters.”

A slowing economy would be on trend, for the past four years the United States has faced a strong first quarter followed by a slump.

Zandi, however, doesn’t believe this is a structural issue. “I think we’ve been hit by shocks that just lined up with the calendar to generate this kind of effect over the past four years,” he explains. “There are also some seasonal adjustment issues. The recession hit at the end of 2008, beginning of 2009, and that affects the way the government seasonally adjust the data. It tends to make things look stronger at the end and beginning of the year and weaker in the middle.”

Zandi looks to tax increases and spending cuts as the main instigators of the coming spring drag. “Some of the sequester is already in the economy, but the major part is still to come,” he tells The Daily Ticker. “I think the apex of that pain will be felt this summer.”

Zandi believes that the sequester will be felt for many years. The hit to GDP this year alone is about 1.5%, the biggest fiscal drag the U.S. has experienced since the end of World War II. According to Zandi, the economy won’t bounce back until mid-decade.

There is a silver lining to the cloud that is the current U.S. economy. We’ve de-levered very rapidly since the 2008 recession, says Zandi. “We’ve reduced debt, and our private sector balance sheet is as good as I’ve ever seen it. I think that will shine through when we get through these fiscal headwinds. By this time next year the better private sector will be more evident,” he claims. He explains that when you look at the private sector’s record high profit margins, it’s clear that there is no disconnect between the economy and the bull market.

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