by Jill Johnson, Vice President, The Corundum Group
As 2012 rolls on, we continue to watch the economy with rapt attention. This election and the handling of the pending “fiscal cliff” will both be very telling as to where markets and the global economy will head in coming years.
Congress is operating in an almost continual state of gridlock, and one of the most severe impacts of the stalemate will be felt when and if a series of planned tax increases and spending cuts go into effect the first day of 2013.
Few would argue that the shock of going off this fiscal cliff, as it is being called, would be easy for our economy to absorb. Among the changes are the expiration of the Bush-era tax cuts, the Obama payroll-tax holiday, emergency unemployment benefits, and the reversion of exemption levels for gift and estate taxes. The New Year will also see the introduction of new taxes to support the recently passed healthcare law. When you look at all these factors you can’t help but hope for teamwork in Washington. Election outcomes will impact this whole scene as well as the following chart shows.
The uncertainty around the fiscal cliff causes us to remain wary and has likely contributed to the sluggish pace of recovery we experienced during the second quarter. According to a survey of small business leaders conducted by the US Chamber of Commerce, 90% are concerned about the impact the fiscal cliff will have on their business growth. Nearly three-fourths of the respondents believe the recent healthcare law makes it harder to hire more employees. Global factors are also contributing to a fear of the unknown, fueled by economic challenges that continue to impair most of Europe and a slowdown in China.
Chart Source: RBC Global Asset Management, CBO, GS, RenMac, BoAML, DB, Eurasia Group, ISI. Note: Figures and scenarios are rough estimates. * Bush tax cuts for households with <$250K in income, Alternative Minimum Tax patch, tax extenders package. ** Original targeted debt ceiling cuts, old stimulus expiration, overseas military draw-down.