2012 Midyear Outlook: High-Anxiety Economy to Linger
From now until at least the November elections, and possibly for many more months after that, worry about Washington will dominate.
As federal borrowing approaches the legislated limit, and year-end deadlines that trigger higher tax rates and deep, automatic federal spending cuts near, with no action taken by Congress to avert them, businesses and consumers will keep their powder dry. They’ll be loath to commit to new investment in equipment or manpower and will delay unnecessary purchases.
Congress, for now, is doing little to dissipate the anxiety. If anything, the rhetoric from Capitol Hill heightens it.
“It’s the wrong place, wrong time for a whole set of big agreements in Congress,” says a former Senate Republican leader. “The political atmosphere won’t change, even at a 1% GDP.
“I can’t see Speaker (John) Boehner putting his name on an agreement that could pass and that Obama would get credit for, and Boehner might be crucified for,” he says. “It won’t even come to that.”
But preelection politicking will give way to a deal after the November elections. Congress won’t drive off the fiscal cliff.
Look for lawmakers to agree to a short-term expansion of the federal debt ceiling and to defer negotiation of budget cuts until 2013. Expiring tax breaks will be extended for at least 98% of taxpayers -- maybe all -- but possibly not until January.
The damage would be too great otherwise -- knocking four percentage points from 2013 GDP and sending the economy into another recession.
But even worry about the possibility hurts.
There are signs, for example, that businesses want to hire more, but won’t. Companies are instead extending the workweek, hiring temps and adding part-timers. Consumer confidence is falling again, sinking back to near-recession levels. Consumer spending growth for the year isn’t likely to top 2% and may slip even lower.
All told, the angst may steal up to a full point from second-half growth. So 2% at best. With its vigor already sapped by the euro crisis and global slowdown, the U.S. economy would then be particularly vulnerable to any additional blow.
And the sad fact is that the anxiety isn’t likely to disperse anytime soon, though after the elections, it will be easier for businesses to assess some probabilities. If both the Senate and the White House go Republican, for example, a deal on taxes will keep low rates even for top-incomers. If both remain in Democratic hands, odds are better than even that the wealthiest 2% of taxpayers will see higher rates.
“If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced-budget reduction package that asks millionaires to pay their fair share,” says Senate Democratic Leader Harry Reid (NV).
Federal debt and deficit worries will dog the economy at least until spring 2013. It’s unlikely that a lame-duck Congress will do more than extend the deadline for automatic spending cuts (with 50% to come from defense) for a few months.
No matter who wins in November, spring brings the best odds of a long-term deal -- a bipartisan agreement that commits Washington to a course of steady reductions in the deficit. Realistically, it must include both spending cuts and revenue hikes and that won’t happen in an election year.
And if politicians can’t find a solution, kicking the can down the road by delaying decisions would no longer suffice. Wall Street pressure would be intense -- and the economic toll, unbearable.