Economists say jobs plan cuts risk of US recession

The United States economy would get a boost of up to 2 per cent under President Barack Obama's US$447 billion jobs plan, say economists at Goldman Sachs Group, Moody's Analytics and JPMorgan Chase & Co.

"The US is on the cusp of a recession," said Mark Zandi of Moody's Analytics in Pennsylvania.

"The plan would go a long way towards stabilising confidence, forestalling another recession and jump-starting a self-sustaining economic expansion."

The proposal, which would raise infrastructure spending and halve payroll taxes paid by workers and small businesses, would add 2 per cent 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 per cent or more for two years, damping consumer spending.

Tax cuts account for more than half the dollar value of the plan, which includes US$105 billion in infrastructure spending for school modernisation, transport projects and rehabilitation of vacant properties.

The proposal includes US$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.

A reduction in government spending, the end of the payroll-tax holiday and expiry of extended unemployment benefits would have cut GDP by 1.7 per cent in 2012, said JPMorgan chief US economist Michael Feroli.

Instead, the Obama proposal more than made up for that potential loss and might add a net 0.1 per cent to the economy, he estimated.

"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 per cent to the economy, while Macroeconomic Advisers said 1.3 per cent and UniCredit Research up to 2 per cent.

"This plan would reduce the odds of a recession to very low levels," said Joel Prakken 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."

Public opinion of Obama as well as Congress has hit new lows since a partisan fight over raising the Government's debt limit that took the country to the edge of default.

Some economists were less impressed with Obama's proposals.

"It looks like an amalgam of things we've already seen," said Stephen Stanley of Pierpont Securities. "I don't know why you would demand a joint session of Congress to deliver such a pedestrian package."

Harvard University economics professor Martin Feldstein said the plan might result in less consumer spending than expected because people might save tax cuts.

- BLOOMBERG