–US Economy Is Gradually Healing, Gradually Getting Stronger

By Brai Odion-Esene

WASHINGTON (MNI) – U.S. Treasury Secretary Timothy Geithner
Wednesday warned that should the headwinds from oil prices, Iran or the
Eurozone crisis cause a slowdown in the recovery, the U.S. economic
activity will not expand at the rate needed to make substantial dents in
the unemployment rate.

Right now, however, “the U.S. economy is gradually healing,
gradually getting stronger,” Geithner said during a moderated discussion
at the Brookings Institution, adding that despite the many headwinds —
such as the crisis in Europe and high oil prices — “we are making quite
a bit of progress.”

In its World Economic Outlook Tuesday, the IMF revised up U.S.
growth by 0.3 to 2.1% in 2012 and by 0.2 to 2.4% next year.

Geithner said growth would need to be at a rate far above 2.25% to
2.5% for the unemployment rate to decline at a more significant pace.

If oil prices, Iran tensions, or Europe’s struggles conspire to
slow the momentum of the U.S. economic recovery, then U.S. growth “will
be at the weak end of that range,” Geithner predicted.

However, “we are in a much stronger position to deal with even
those challenges than we were even six months or a year ago. Most things
you can look at and measure in the U.S. economy today suggest more
resilience,” he added.

Geithner described economic strength in the U.S. as “pretty
broad-based,” from agriculture, energy, high-tech, to the manufacturing
sector.

And the continued weakness in the construction and housing sectors
is understandable and necessary, Geithner said.

He said the economy is making a broad adjustment towards becoming
more export and investment-led, with an improvement in the private
savings rate — and the beginnings of improvement in public savings —
and the financial sector is “much more stable.”

In addition, the world is the early stage of “a very long period of
pretty substantial rates of growth in the emerging world,” Geithner
said, “and we are better positioned than most developed economies to
take advantage of that.”

Still, there are some risks and uncertainties ahead, the Treasury
Secretary said, citing the “very long, protracted, difficult” challenges
ahead for Europe.

He added that although oil prices to date have not had a materially
significant and negative effect on overall growth, “there is still a lot
of uncertainty around oil markets.”

And looking forward to the end of the year, the U.S. is faced with
the expiration of a substantial number of tax cuts.

“The potential impact of a large automatic cut in spending, another
debt limit debate,” Geithner said, “will be a big test of Washington,
big test of the capacity of this country to govern itself.”

Tax reform is coming, it is “inevitable” and necessary, he said,
with the only question being what form it will take.

Geithner said there are three things lawmakers could do to provide
some reassurance to financial markets.

“One is that Congress will pass the debt limit without all the
drama and politics and damage,” he said.

The second is to recognize that the tax proposals being debated
would affect 2% of taxpayers and would involve only a modest increase in
the effective tax rate of those Americans. So only a “very small
fraction” of the American economy would be affected.

The third is that restoring fiscal sustainability must be done in a
manner that is “calibrated to the strength of growth and recovery,”
Geithner said.

“If you cut too quickly, if you try to bring about too precipitous
a withdrawal of fiscal stimulus then the risk is that you do damage to
the recovery and you undermine the objective you are trying to move
forward,” he added.

If Capitol Hill can show a commitment to the above three tenets,
that would help reduce some of the uncertainty surrounding the end of
the year.

** MNI Washington Bureau: 202-371-2121 **

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