Cuts Could Trigger Slowdown: Kiplinger Economic Forecasts

Spending cuts and cutbacks businessman holding scissors and cutting banknotes in his hands

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If spending cuts are required to resolve the looming debt limit crisis, they will likely be moderate and/or spread out over time, so as not to ding current GDP growth too much. However, any cuts that take place at a time when the economy is slowing will likely make that slowdown a little worse.

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There is precedent for this sort of outcome. The 2011 debt limit fight between President Barack Obama and House Republicans resulted in $917 billion in cuts spread over 10 years, which reduced the immediate impact on the economy.

Lack of resolution to the debt crisis

But note that the White House is determined to avoid compromise, hoping instead that fissures in the GOP eventually drive moderates to its side. With no resolution, Uncle Sam can spend only the revenue coming in from taxes and other sources, triggering even more painful automatic spending cuts.

The timing of a potential crisis depends on June 15 quarterly tax payments. These could delay the moment of truth until late July or early August if they’re good. Otherwise, the debt limit would be hit in June, per recent Treasury Department warnings.

Troubles with manufacturing

Manufacturing’s April expansion doesn’t mean the sector is out of the woods, despite a benchmark survey showing improvement in orders, production, hiring and exports.

Other parts of the survey indicate a future slowdown: Businesses think customer inventories are too high, which happens only when a downturn is coming. Manufacturer inventories and order backlogs are also contracting.

Still, it’s likely that any slowdown will be gradual, a source of frustration for the Federal Reserve, which had hoped for faster relief of price pressures.

Manufacturers face a dilemma with their suppliers. Facing parts shortages in 2021 and 2022, many had expanded the number of suppliers they worked with to hedge against supply chain risk. With demand waning, they’ll face a tough choice between the hard-won diversification of their supplier bases and preserving cash.

This forecast first appeared in The Kiplinger Letter. Since 1923, the Letter has helped millions of business executives and investors profit by providing reliable forecasts on business and the economy, as well as what to expect from Washington. Get a free issue of The Kiplinger Letter or subscribe.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.