Recession 2013: Can We Avoid It?

The U.S. economy is currently two-for-two in its attempts to skirt recession 2013.

The first came after we narrowly avoided a tumble over the fiscal cliff with a down-to-the-wire deal on New Year's Day. The second came Wednesday with the passage of a three-month extension on raising the debt ceiling.

Had we not averted one or the other, the Congressional Budget Office warned on numerous occasions that a recession in 2013.

But we are not out of the woods just yet, even though the odds may have changed.

Looming Threats of Recession 2013

The passage of the House Republican bill to suspend the debt ceiling for three months, allowing the government to keep paying its bills and giving lawmakers additional time to hammer out a long-term deal, is just a Band-Aid on a bleeding wound that will ultimately require long-term treatment.

Washington lawmakers still need to agree upon a bevy of steep across-the-board spending cuts that can't be avoided forever. Those spending cuts are delayed until March, and could still inflict some serious damage to the U.S. economy.

When combined with the tax increases that did occur as part of the fiscal cliff deal, the impact from those looming spending cuts could result in trimming the country's economic growth of some 1.25% this year.

The CBO cautioned in November that "if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5% in 2013, reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year."

In other words, the CBO predicted a recession in the first two quarters of the year.

A long-term budget plan is needed by April 15 (i.e. spending and entitlement cuts), and it's possible the crew on Capitol Hill will have to wrangle over the debt ceiling again come May 19.

So, while we have dodged a dip in GDP for the first part of the year, a GDP slip could easily come in the second half.

Budget Deal Aside... It's the Economy

Economist and author John Williams believes the economy is hurting more than most people suppose.

For 2013 he says, "As this goes forward, you're going to see we're going to be in a new recession."

Citing the Fed's loose monetary policies aimed at juicing stagnant growth, Williams wrote on his website (which analyzes government statistics), "That's nonsense...There's nothing they can do to stimulate the economy."

Williams has long maintained that the Fed's moves are nothing more than a lifeline to the troubled U.S. banking system.

"If the Fed wasn't doing what it's doing...I'd presume you'd be on the road to a banking system collapse. The banking system is still in trouble," said Williams.

Bottom Line: The swollen $16.4 trillion debt ceiling is unquestionably troubling - meaning a debt ceiling deferral may have only delayed recession 2013.

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