'Fiscal cliff' fight already a drag on U.S. economy

October 10, 2012

The Washington Times

Patrice Hill

Worries about the federal government’s “fiscal cliff” are taking their toll on the economy well ahead of the year-end deadline, which analysts say is looking like it may be more damaging in the run-up than in the reality.

Businesses frequently cite uncertainty about what will happen with $600 billion in government spending cuts and expiring tax breaks scheduled to start taking effect Jan. 1 as their reason for refraining from hiring or spending on facilities and equipment. Reports make it clear that this uncertainty contributed significantly to the economic slowdown in the spring and summer as well as to a continuing slump in manufacturing.

Activity at the nation’s factories — already depressed by the recession in Europe and slowdown in China, two of the biggest U.S. export markets — went into reverse during the summer as U.S. businesses put orders on hold.

Job growth trailed off from robust levels of more than 200,000 a month earlier this year as employers shied away from making permanent staffing decisions in a fog of political uncertainty.

“The primary catalyst for the slowdown in the economy has been dysfunctional fiscal policy,” said Ward McCarthy, managing director at Jefferies & Co., noting that U.S. growth has slowed from 2 percent on average last year to 1.6 percent in the first half of this year. He expects growth to brake further to about 1 percent in the final months of the year.

“The closer the politicians take the economy to the edge of the cliff, the greater will be the associated anxiety and uncertainty that fiscal policy will generate an economic calamity, and the more damage that will be done,” he said.

The decline in business investment — a key source of strength driving the economic recovery since 2009 — emerged dramatically last month when orders for big-ticket goods plummeted by 13 percent. Analysts said business investment in equipment likely declined during the summer quarter for the first time in the three-year recovery.

“As anxiety and uncertainty about the fiscal cliff have increased, businesses have made the prudent decision to delay investment spending decisions,” Mr. McCarthy said.

Just as growth has slowed precipitously, hiring also hit a wall, with job growth falling from 225,000 a month on average in the first quarter to 145,000 in the summer quarter. “The labor market has clearly lost traction,” Mr. McCarthy said.

Delaying hiring, investment

While business groups have complained loudly about the dangers of the fiscal cliff for months, many have told their members privately that Congress is likely to avert a disaster by agreeing to at least postpone the year-end deadline, giving time for the newly elected president and Congress to resolve the unsettled budget matters early next year. But those assurances have not sufficed to prevent businesses from worrying that their taxes could shoot up or payments on their contracts with the government could be suspended suddenly.

“There’s no sense in hiring right now, and there’s no point in investing right now,” said David Cote, chief executive officer of Honeywell International Inc., a top defense and aerospace contractor. “We are waiting to see what is going to happen, and it causes everything to slow down.”

Uncertainty about the outcome of the close presidential election is adding to business hesitation. Riding on the election is the fate of President Obama’s health care reform and Wall Street regulatory measures, among other laws and regulations that impose major mandates and requirements on businesses.

Even for businesses that aren’t inclined to wait, the hoopla surrounding the fiscal deadline — including much-trumpeted predictions that it will throw the U.S. economy into a deep recession — have led many to postpone plans until the outlook is clearer.

U.S. consumers, in contrast, seem less concerned about the year-end deadline and have even staged a minor spending revival in recent weeks. Surveys show that consumers are not paying attention to the deadline, although consternation about political gridlock overall registers with the rock-bottom approval ratings that voters give to Congress.

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