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By Jason Stipp and Robert Johnson, CFA | 09-11-2013 11:00 AM

5 Headwinds on the Recovery

Higher taxes, tight credit, government cutbacks, and more have detracted substantially from U.S. GDP, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. We're now over four years into the economic recovery, an impressive amount of time, but the strength of the recovery itself has failed to impress. So what's holding us back?

Here to offer some insights is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here today.

Stipp: You have listed several factors that have been holding back the recovery, and you also have some ideas on whether those will continue to be headwinds or whether they might give us a little bit of relief at some point.

The first one is new taxes. We did see taxes go up this year as part of the fiscal cliff dealings. How much have they held us back, and are we going to see any relief on that front?

Johnson: Between taxes and spending, we probably took over 1%, maybe even 1.5%, off of what GDP growth otherwise would have been. It's a very, very significant number.

The payroll tax alone going up is $110 billion, and that amounts to about a 1% number in terms of personal income. So it's a huge number. Then you've got income taxes, where some withholding [amounts] went up at the beginning of the year. But the real big impact is [going to occur] when people make their estimated taxes, when they write their final check for 2012, and start doing their planning for what they're going to pay for 2013. Some of that's ongoing. And I think that those numbers are still going to be difficult. I think everybody knows and understands the payroll tax. That one is pretty well behind us. We've adapted. I think with the income tax, we might see more of an impact here in the second half, but then if we look forward to 2014, hopefully, that tax penalty is well behind us.

Stipp: So we're not necessarily expecting taxes to go down, but people will get used to the levels where taxes are now and eventually will adjust, and we'll be able to see growth after that.

Johnson: Exactly.

Stipp: Another issue I know that's had an effect perhaps across the economy, but maybe especially in housing, is that credit still remains tight, even though we have the financial crisis pretty far in the rearview mirror at this point.

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