Jim McCaughan: Fiscal Cliff Might Not Hurt Corporate Earnings

Monday, 17 Dec 2012 07:52 AM

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Corporate earnings will likely improve going forward despite the possibility that Washington will fail to steer the country away from the fiscal cliff, said Jim McCaughan, CEO of Principal Global Investors.

The White House and congressional Republicans continue to negotiate ways to avoid the fiscal cliff, a combination of sweeping tax hikes and deep spending cuts scheduled to take effect at the end of this year.

Failure to avoid the cliff could tip the country into a recession, and fears surrounding the cliff alone have prompted businesses to throttle back on investing in new projects and instead remain in idle to see what happens, a wait-and-see mode that also hampers the economy and markets.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

Still, expect some sort of compromise and earnings to improve, McCaughan told CNBC, as the fundamentals of the U.S. economy are recovering.

“I suspect the third quarter for this year will actually be the lowest for several quarters in terms of profitability. The things I would point to that are improving is the renaissance of American manufacturing, which is driven by productivity,” McCaughan said.

Lower oil and natural gas prices are also bolstering manufacturing and other corners of the economy, creating jobs in the process.

The housing market is showing signs of a recovery as well.

“At last it’s reached bottom, it appears, in most of the country. The inventories have been worked through and you’ve seen evidence of some strength there,” he told the network.

“So I think there’s room for some very cautious optimism bearing in mind that Washington still could produce a recession if they cannot come to any agreements and get their work done.”

Growth next year won’t come roaring back to pre-recession levels, with the country’s gross domestic product likely expanding by 2 to 3 percent next year.

Businesses and households will continue to pay down debts, while lawmakers must address raising the debt ceiling early next year as well, which could complicate negotiations to avoid the fiscal cliff.

“There will be pretty slow growth, partly because of the disarray in Washington, partly just because of the debt overhang, the deleveraging process that is going on in the economy,” McCaughan said.

“You will see some modest moves on the deficits on the first half, you will see a lot of political tussling over the terms for raising the debt ceiling, it will be pretty messy and it will create volatility but I think ultimately the fundamental strengths of the U.S. economy will continue to come through.”

President Barack Obama and House Speaker John Boehner, R-Ohio, met recently to discuss ways to clear hurdles to avoid the fiscal cliff.

Taxes have served as a sticking point, with Democrats insisting fiscal reforms needed to avoid the cliff must include tax hikes on the top 2 percent of U.S. earners.

Meanwhile, uncertainty alone continues to drag on confidence and in turn, dampens the overall economy, said the nation’s top central banker.

“Clearly the fiscal cliff is having effects on the economy,” Federal Reserve Chairman Ben Bernanke told reporters recently, according to The Associated Press.

Both sides of the political aisle need to resolve the issue quickly.

“I’m hoping that Congress will do the right thing on the fiscal cliff,” Bernanke said, the AP added.

“There is a problem with kicking the can down the road.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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