Why we're not even close to a robust recovery

The reality is the opposite: For several reasons, growth will slow further in the second half of 2012 and be even lower in 2013—close to stall speed. First, growth in the second quarter has decelerated from a mediocre 1.8 percent in January-March, as job creation—averaging 70,000 a month—fell sharply.

Second, expectations of the “fiscal cliff”— automatic tax increases and spending cuts set for the end of this year—will keep spending and growth lower through the second half of 2012. So will uncertainty about who will be president in 2013; about tax rates and spending levels; about the threat of another government shutdown over the debt ceiling; and about the risk of another sovereign rating downgrade should political gridlock continue to block a plan for medium-term fiscal consolidation. In such conditions, most firms and consumers will be cautious about spending—an option value of waiting—thus further weakening the economy.

Third, the fiscal cliff would amount to a 4.5-percent-of-GDP drag on growth in 2013 if all tax cuts and transfer payments were allowed to expire and draconian spending cuts were triggered. Of course, the drag will be much smaller, as tax increases and spending cuts will be much milder. But, even if the fiscal cliff turns out to be a mild growth bump—a mere 0.5 percent of GDP—and annual growth at the end of the year is just 1.5 percent, as seems likely, the fiscal drag will suffice to slow the economy to stall speed: a growth rate of barely 1 percent.