UPDATE 3-White House lowers growth forecasts, brightens jobs picture

Sat Jul 28, 2012 4:23am IST

* Obama team cites continued serious headwinds for economy

* Jobless rate seen lower, medium-term deficits slimmer

* Review assumes Congress will enact White House proposals

By Laura MacInnis

WASHINGTON, July 27 (Reuters) - The White House cut its outlook for U.S. growth in 2012 and 2013 on Friday, hours after data showed the economy grew at a tepid pace in the second quarter, raising concerns about a slowdown that could mar President Barack Obama's re-election chances.

In its semi-annual budget review, the White House said it expected gross domestic product to rise 2.3 percent this year and 2.7 percent next year - less than the 2.7 percent and 3.0 percent growth projections it made in February.

"The economy still faces significant headwinds that have held down growth and limited gains in employment," Jeffrey Zients, acting director of the White House Office of Management and Budget, said in a statement accompanying the review.

But the White House brightened its forecast for unemployment - one of the key barometers of Obama's economic leadership - to a 8.0 percent rate this year and 7.7 percent next year, from its first estimate of 8.9 percent in 2012 and 8.6 percent in 2013.

It also said the deficit would be slimmer this fiscal year - from October through September - than first anticipated, at $1.211 trillion instead of $1.327 trillion, and be slightly wider than first projected in fiscal 2013. Over the next decade, the White House said cumulative deficits would be $240 billion lower than it forecast in February.

'OPTIMISTIC'

The mid-session review, like the original White House budget proposal released in February, assumes Obama's economic and job growth proposals will be enacted despite the stark partisan divisions in election-year Washington.

Zients said it also "reflects the administration's belief that Congress can and must enact a comprehensive and balanced deficit reduction package" to avoid mandatory spending cuts that are due to take effect in January.

Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, said the deadlock in Congress had kept many White House economic plans from being passed, and raised questions about the basis of Friday's figures.

"These numbers can be a bit deceptive," he said.

The Committee for a Responsible Federal Budget, a Washington think tank, said the lower growth forecast was a major reason deficits were seen decreasing in the review, averaging 3.2 percent of gross domestic product over the next decade, compared to a 3.3 percent average projected in February.

But it warned: "these estimates may turn out to be overly optimistic ... and still fall short of putting the debt on a clear and unequivocal downward path over the medium- and long-term."

Obama's 2013 budget proposal was not passed by Congress, where Republicans controlling the House of Representatives oppose raising taxes and Obama's fellow Democrats who control the Senate want to collect more revenue alongside spending cuts.

An agreement struck last August to avert a sovereign default set spending levels for this year. Another fight is brewing over tax hikes and spending cuts slated for the end of 2012, a convergence of timing referred to as the "fiscal cliff."

FISCAL FIGHT

Kent Conrad, a North Dakota Democrat who chairs the Senate Budget Committee, said after the mid-session budget review was released that lawmakers needed to be ready to compromise to avoid damaging the economic outlook.

"The solution must include a comprehensive and balanced long-term deficit reduction plan. That can only happen if both sides agree to move off their fixed positions," he said.

But Paul Ryan, a Republican from Wisconsin who chairs the House Budget Committee, seized on the mid-session review as showing strained growth with budget deficits remaining above $1 trillion for a fourth consecutive year.

"The administration's lack of seriousness when it comes to responsibly prioritizing taxpayer dollars is unconscionable," Ryan said. "Instead of taking more from hardworking Americans and small businesses, policymakers must advance principled pro-growth solutions that spur job creation, lift the crushing burden of debt and expand opportunity for generations to come."

Earlier on Friday, the Commerce Department said gross domestic product expanded at a 1.5 percent annual rate between April and June, the weakest pace of growth since the third quarter of 2011.

The budget was a searing political issue last summer, when a standoff between Democrats and Republicans over deficits and taxes brought the country to the edge of sovereign default and led to a credit rating downgrade.

Friday's weak second-quarter growth figure and continued concerns about unemployment are major political worries for Obama ahead of the Nov. 6 presidential election. His presumed Republican opponent Mitt Romney has criticized the Democrat as lacking the experience needed to straighten out the economy.