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Economists: Federal deficit a bigger risk than terrorism

Reuters | March 22, 2005

WASHINGTON — The budget deficit has overtaken terrorism as the greatest short-term risk to the U.S. economy, and concern about the current gap is rising, a survey of U.S. businesses shows.

In a survey of 172 members of the National Association for Business Economics, 27% said the deficit or government spending is the largest short-term threat to the economy, up from 23% who thought so in August. ( Related :Top economic forecasters. )

Terrorism dropped to second on the list, with 24% saying it is the biggest threat, down from 40%. Those most concerned about the deficit in the current account — the largest measure of U.S. trade with other nations — tripled, to 15% from 5% in August.

"Longer term, the costs related to the aging of the population dominate the challenges to sustaining economic growth. However, the panel is doubtful that this Congress will pass needed Social Security reforms," said David Wyss, chief economist at Standard & Poor's, who conducted the analysis for the report.

Concerns about energy costs rose to 11% from 6%, while just 6% saw inflation as the biggest short-term threat, down from 9% in August.

Unemployment, seen as the greatest risk at this time last year, was cited by just 2% of respondents — a clear sign of how the labor market has improved in the past 12 months. Some 2.2 million jobs were created in 2004.

The survey, taken between Feb. 28 and March 8, found U.S. businesses had three nearly equal concerns about longer-term risks: health care, the aging population and the federal deficit.

The panelists also gave the Federal Reserve a strong vote of confidence, with 63% saying monetary policy is about right, up from 59% in August.

However, two-thirds of respondents believe short-term interest rates should be increased the next six months, and 97% believe they will be. Respondents were about evenly split between increases of 0.5, 0.75 and 1.0 percentage point the next six months.

Fed policymakers have raised rates six times since June, taking their target for overnight borrowing costs among banks to 2.5%, and they have said they believe rates can continue to be increased at a what the Fed calls a "measured pace." The Fed is trying to get rates to a "neutral" level that neither increases nor retards economic growth.

The survey showed less confidence in the federal government, with only 17% saying fiscal policy is about right. More than three-quarters said the tax and spending of the government was too stimulative to the economy — and 31% expect deficits to increase.

While 69% said the Social Security retirement system has serious problems and should be fixed, the respondents rate the odds of major reform as only 36% the next two years.

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