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Monday, December 3, 2012

Fiscal Cliff Already Hurting the U.S. Economy

While many politicians and economists talk about the potential for another recession if the U.S. goes over the "fiscal cliff," few seem to recognize that the fiscal-cliff debate itself is already damaging the economy. This is shaping up to be a repeat of the 2011 debt ceiling debacle -- only worse. New Gallup economic data show:

  • Small-business owners are pessimistic about the economy, with one in five expecting to reduce the size of their workforce over the next 12 months.
  • Upper-income spending has declined sharply over the past two months.
  • Payroll to Population fell below year-ago levels in November.
For most of 2012, self-reported upper-income spending has run higher than in 2011. However, the reverse was true in October and November, with upper-income spending averaging no better than the depressed levels experienced in the late summer of 2011, after the debt ceiling battle.

The sharp falloff in upper-income spending makes sense, given the general presumption that these Americans are going to face substantially higher federal taxes next year. An unknown higher level of taxes can easily translate into a tendency on the part of these consumers to pull back on spending. The timing of this sharp pullback could not be worse for the nation's retailers, given the importance of the Christmas sales season.

Gallup's unemployment data suggest that the government will report an increase in the seasonally adjusted unemployment rate for November -- possibly back to 8.0%. However, what is really happening in the job market is better illustrated by Gallup's Payroll to Population (P2P) measure. After remaining substantially above year-ago levels during the summer and early fall, the P2P plunged in November, falling below 2011 levels.

Overall, the U.S. economy seems to be at a standstill as the political situation in Washington, D.C., is having a chilling effect on the economy -- much as it did during the debt ceiling debate of 2011. Political compromise eased the situation almost immediately last year, allowing the economy to avoid another severe recession in 2011. In 2012, the political and economic situation is more complicated, with many real-world tax and spending effects involved -- not just political positioning, as was the case a year ago. In turn, this greatly increases the odds of another recession in 2013 -- regardless of when the fiscal cliff is addressed.


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