Tags: us | economy | Soft | Patch

Mizuho Securities’ Ricchiuto: Soft Patch Could Last Through Year’s End

Friday, 13 Jul 2012 12:07 PM

The U.S. economy's current soft patch could last through the end of the year due to uncertainty surrounding possibly sharp adjustments to tax and spending levels, says Steven Ricchiuto, the chief economist at Mizuho Securities USA.

At the end of the year, the Bush-era tax cuts and other tax holidays expire, while automatic cuts to spending kick in, a combination dubbed a fiscal cliff that could derail recovery if not addressed.

Since lawmakers may be unwilling to tweak with tax and spending policies in an election year, expect businesses to hold off on expanding this year, which means the economy today won't change much from now until the end of the year.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

"The soft patch could easily extend through year-end or almost a full year,” Ricchiuto writes in a note to clients, according to the New York Times.

“Companies are unlikely to hire, invest in new plants and equipment or build inventory. This pullback could very well last through year-end as the chances of any movement on the fiscal front are unlikely until after the election.”

Other economists say the economy today is likely as good as it gets for the year or may make slight improvements.

“The pace of economic growth is picking up, but not to a rate that is very robust,” says Joel Prakken, chairman of Macroeconomic Advisers, an economic consultancy, the New York Times adds.

“It certainly is no great shakes.”

Uncertainty is crimping consumer sentiment, which doesn't bode well for the country, considering that consumer demand drives about 70 percent of the U.S. economy.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment fell to 72.0 in July from 73.2 in June, worse than economists' calls for a gain to 73.4, Reuters reports.

The figure was the lowest since December, with only 19 percent of consumers expecting to be financially better off in the coming year.

The numbers depict an economy that continues to limp along the road to recovery.

"Sentiment is really soggy. The series is not tumbling, which would be particularly worrying to markets and the Federal Reserve. But it fell another point and it's now down seven points from the peak in May, about where it was this time last year," says Cary Leahey, managing director and an economist at Decision Economics, Reuters adds.

"You can't get overly concerned at the moment, but it's just an indication that the average household is pretty queasy about the current state of play and the U.S. economy. But they certainly realize that we're no longer in the grips of the 2009 recession."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.


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