The U.S. economy should enjoy favorable winds once it navigates the impending fiscal negotiations in Washington, forecasters predicted at the New England Economic Partnership’s semi-annual Outlook Conference held yesterday at Bryant University in Smithfield RI.

The national forecast presented by Edward Friedman, Director, Moody’s Analytics, emphasized that the recovery, though ongoing, lags because of weak hiring.  Job creation is slow despite strong corporate profits and balance sheets, holding back consumer spending even as household balance sheets and house values improve. The Federal Reserve is playing a weak hand well, but fiscal policy is the key to short- and long-term growth.

With regard to the “fiscal cliff” scenario, Friedman noted that the impact of tax increases on the economy would far outweigh that of the spending cuts, especially in high-income states such as Massachusetts. Failure to achieve some kind of resolution in Washington would quickly lead to a recession roughly comparable to that of 2001 ” but Friedman put the chances of deadlock at no more than 15 percent.

The Moody’s baseline forecast assumes a “middle-ground” outcome that avoids most short-term impacts: payroll taxes will return to higher levels but most of the Bush tax reductions will stand, and defense spending will fall significantly less than under sequestration.

On these assumptions, the Moody’s forecast shows national economic growth (GDP) rising in the course of 2013 from the current 2 percent annual range to above 4 percent, easing off to the high threes by 2015. This growth should work off pent-up demand for automobiles and houses, and return employment to, or above, pre-recession levels.

The Massachusetts forecast developed by Alan Clayton-Matthews of Northeastern University, a member of AIM’s Board of Economic Advisors, was built off of the Moody’s baseline.  Our state, Clayton-Matthews noted, is experiencing a deceleration for reasons that include a global slowdown affecting key markets, but is in the fourth year of an expansion that has raised Gross State Product (GSP) 4.5 percent above its pre-recession peak, and brought back 87 percent of the jobs lost.

Looking ahead, he forecast moderate GSP growth (2.3 percent) in 2013, accelerating in 2014 (3.8 percent) and 2015 (4 percent) before tailing off to 3.4 percent in 2016 due to workforce constraints. Employment, after edging up in 2013 (0.7 percent), would rise more strongly in the out-years, finally surpassing its peak of 2001, although the unemployment rate would remain above 6 percent into 2015. Because housing has become more affordable, Clayton-Matthews added, Massachusetts employers should find it easier to attract and retain younger workers.

The forecast shows construction, professional and business services, information, leisure and hospitality, and education and health services leading the state’s employment growth through 2016. The manufacturing sector will add jobs, though more slowly, throughout the forecast period.

AIM will offer an in-depth look at what’s ahead for the economy in 2013 at the AIM Executive Forum on January 18. Panelists Jerry Sargent, President, Citizens Bank & RBS Citizens, Massachusetts; Katherine Kiel, Professor of Economics, College of the Holy Cross; and Barry Bluestone, Dean, School, of Public Policy & Urban Affairs at Northeastern University will conduct a no-holds-barred discussion about the future for the world economy and what it will mean to employers.

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