Economic Outlook: A clearer view of cliff

By ANTHONY HALL, United Press International  |  Dec. 26, 2012 at 10:35 AM
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With the fiscal cliff a few days away, the actual budget impact is beginning to take shape.

The impact of the $500 billion budget adjustment due to take effect Jan. 1 -- if no other deals are put in place -- would be more prolonged than the sudden crash the image a fiscal cliff might provoke. For example, The New York Times sensibly points out Wednesday, the hit taxpayers would take with the cessation of the Bush-era tax cuts would be spread out over 2013. The end of the payroll tax cut would be immediate but also spread out paycheck to paycheck throughout the year. And spending cuts would take effect in a staggered pattern with some programs unaffected until the end of the fiscal year in September,

Analysts are fine-tuning their expectations, perhaps in an effort to soften the disappointment. Bank of America Merrill Lynch economist Michelle Meyer, for example, said the budget will "bungee-jump over the fiscal cliff," a romantic story line that says the economy will be rescued in mid-January as Congress frantically and boldly steps in and restores the spending cuts and replaces most of the tax cuts.

It is hard to imagine that suddenly a gust of cooperation will sweep through Washington, but this is pure, unadulterated fear on the table at this point and lawmakers can certainly pull together when the wolf is at the door.

"What's been missing in this recovery has been confidence. We'd see a healthy recovery if it weren't for this uncertainty and the potential shock from Washington," Meyer told the Times.

Meyer is among those with shaken confidence. She only gave her bungee-jump theory a 40 percent chance of taking place.

But even a sudden gust of sensibility in Washington would land the economy back into a recovery that is sluggish at best. Economist with a variety of budget scenarios to choose from are predicting the gross domestic product will grow between 1 percent and 2.5 percent in the first quarter of the new year, a drop from the 3.1 percent growth in the third quarter of 2012.

Then again, the recovery, if it ever picks up steam, is going to be a particularly painful one -- or confusing.

A strong recovery will set the unemployment rate back on its heels as millions of workers who have stopped looking for work decide to rejoin the labor pool.

The 7.7 percent unemployment rate is artificially low. As people stop looking for work, they drop out of the statistical pool.

As job creation picks up, the unemployment rate will likely grow, as those sidelined job seekers catch wind of the recovery and jump back into the mix.

In international markets Wednesday, the Nikkei 225 index in Japan added 1.49 percent, while the Shanghai composite index in China rose 0.25 percent. The Sensex in India rose 0.84 percent.

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