As spending cuts loom, US economy showing strength

Home prices are also rising steadily, and banks are lending more. Such improvements suggest that the economy is resilient enough to withstand the deep government cuts that will kick in Friday.

That's especially encouraging because uncertainty over the federal budget could persist for months.

“The stars are lining up for stronger private sector growth this year,” said Craig Alexander, chief economist at TD Bank.

Sales of new homes jumped nearly 16 percent in January to their highest level in 4 1/2 years, adding momentum to the housing recovery. Consumer confidence rose in February after three months of declines. And home prices increased in December from the same month in 2011 by the largest amount in more than six years.

The upbeat economic news contributed to a rally on Wall Street. The Dow Jones industrial average jumped more than 100 points.

Consumers still face numerous burdens. Among them is a sharp increase in gas prices. The national average for a gallon, US$3.78 (US$1 a liter), has surged 44 cents in a month.

And Social Security taxes rose 2 percentage points beginning Jan. 1. This year, the increase will cost a typical household that earns US$50,000 about US$1,000. Income taxes for the highest-earning Americans also rose.

Both factors could reduce overall spending.

On Friday, about US$85 billion in automatic spending cuts are to kick in, and there's little sign that the White House and Congress will reach a budget deal to avoid them. The cuts will cause furloughs and temporary layoffs of government workers and contractors and sharply reduce spending on defense and domestic programs.

For about 2 million long-term unemployed, benefits now averaging US$300 a week could shrink by about US$30. Payments that subsidize clean energy, school construction and state and local public works projects could be cut. Low-income Americans seeking heating or housing aid might face longer waits.

Overall, the tax increases and spending cuts could shave up to 1.2 percentage points from growth this year, economists estimate. Alexander estimates that without the spending cuts or tax increases, the economy would expand more than 3 percent this year. Instead, he predicts growth of only 2 percent.

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