Looming 'fiscal cliff' is hurting US economy now, economists warn
Memo to Washington: Don't wait until after the election to resolve the 'fiscal cliff' facing the nation on Dec. 31. Uncertainty about taxes and spending is already harming the US economy, risking a new recession, some economists say.
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Economists at the investment bank Morgan Stanley recently downgraded their outlook for US gross domestic product (GDP) in the second half of this year, citing "headwinds" from turmoil in Europe and the fiscal-policy doubts at home.Skip to next paragraph
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Looking further ahead, the team at Morgan Stanley expects that, ultimately, Congress and Mr. Obama will agree to a deal during the "lame duck" session of Congress, after the election. Essentially, the Bush-era tax cuts would be extended and spending cuts delayed, but the phaseout of some tax breaks would still total about 1.5 percent of GDP. That would exert some slowing influence next year – but not be bad enough to cause a recession.
Some forecasters are more pessimistic.
"Businesses are already curtailing investments in machinery and information technology as a hedge against a contracting economy in 2013, and consumers are spending less," he writes.
Mr. Morici says a new recession is possible, even if policymakers act during the lame-duck session to reduce the size of the cliff. It might be too little, too late. And since the Fed and Congress have already spent big in the past few years to try to ignite a recovery, getting out of a new recession would be very difficult, he argues.
The latest news on the economy has some bright spots. Retail sales edged up in the most recent month, after three months of decline. And on Friday, Reuters and the University of Michigan reported that a monthly gauge of consumer sentiment rose.
The Dow Jones Industrial Average has bounced back above 13000 in recent days.
But that doesn't remove the fiscal cliff and other election-related concerns.
Some 9 in 10 small businesses are concerned about Congress’s ability to reach consensus on expiring tax rates and other elements of the fiscal cliff, according to a recent Harris Interactive poll, sponsored by the US Chamber of Commerce.
More generally, 62 percent of likely voters in an American Pulse poll said the uncertainty of the election is affecting their spending habits.
Amid the climate of concern, many economists say it would be best if Congress and the president could act sooner rather than later – or risk seeing the economy deteriorate on their watch.
Davis says he'd like to see a six- or 12-month deal to extend the Bush-era tax cuts and to postpone spending cuts. Similarly, while acknowledging the difficult partisan politics, Morici calls on both sides to compromise now.