NYT: 'Fiscal Cliff' May Already Be Hurting US Hiring, Investment

Friday, 13 Jul 2012 08:10 AM

By Bob Willis

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Business executives and policy makers are increasingly concerned that companies have already begun to rein in hiring and investments even before the so-called fiscal cliff of higher taxes and less spending takes effect early next year.

“It’s an issue now, and it will be increasingly an issue in the second half of the year for people’s decisions,” Douglas Elmendorf, director of the Congressional Budget Office, said recently. He says the uncertainty could cut U.S. economic growth by as much as half a percentage point this year.

The VIX index, which measures volatility, has risen more than 26 percent since the beginning of April, when the media began to focus on the fiscal cliff.

Editor's Note:
See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation


Another index meant to track uncertainty over government policy, created by Stanford University economist Nick Bloom and University of Chicago economist Steven Davis, has risen about 56 percent during the same period.

In a June survey published by the Business Roundtable, chief executives reported growing more pessimistic about the outlook for the economy.

James McNerney, chairman of the Roundtable and chief executive of Boeing, said the concerns included “uncertainty over year-end U.S. government tax and spending plans and a path to resolution of the eurozone crises.”

Data in recent weeks have pointed to further slowing in the economy. Job growth in the second quarter averaged about 75,000 a month, down from 226,000 in the first three months of the year.

The Institute for Supply Management’s factory index showed a contraction in June for the first time in almost three years, while ISM service activity grew at the slowest pace since November 2009, according to Bloomberg News.

Economists say the fiscal cliff is one of several factors weighing on the economy, including Europe’s debt crisis, continuing weakness in housing and a spike in gasoline prices this spring.

Leaders of both the Democratic and Republican parties have said they want to avoid the fiscal cliff, even as they have failed to agree on how to do that.

The tax bill for a typical middle-class household would rise by about $1,750 a year if the Bush administration’s tax cuts are allowed to expire along with additional cuts from President Obama’s stimulus, the Times reported.

If the two parties fail to reach agreement, automatic cuts to both military and domestic spending will also take effect on Jan. 1.

The CBO estimates that failure to reach an agreement would cause about a 4 percentage point reduction in economic output, which some experts say would lead to another recession.

Extending the laws indefinitely without a plan to generate savings would only increase the longer-term debt load. With the presidential and congressional elections looming in November, uncertainty has been heightened.

“Part of the uncertainty is simply not knowing who’s going to be the president and who’s going to be in charge of Congress,” said Dean Maki, the chief U.S. economist at Barclays Capital. “That’s only amplified by the fact that major policy changes need to be made after the election.”

Many analysts compare it to the uncertainty and the slowdown prompted by last summer’s debt-ceiling debate.

Corporations reined in hiring as Congress delayed raising the debt ceiling, according to research by Betsey Stevenson and Justin Wolfers, economists at the Wharton School at the University of Pennsylvania, the Times said.

“We never reached the debt ceiling, we raised it before we reached it, but that didn’t mean nothing bad happened,” Stevenson said. “I think you could say the same thing about the fiscal cliff.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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