Economic Commentaries

Entries for October 2012

15

Economic activity continues to flounder worldwide. Europe is in a recession and Asia, particularly Japan and Chine, is bordering on recession. While we think the U.S. will continue to skirt an actual downturn, the odds of avoiding one are continuing to shrink in our view. For now though, we expect real GDP growth in the second half to come in at about 1%-1.5% annually.

Despite the proximity of the election and the Federal Reserve's traditional reluctance to enter the political fray, the Fed acted decisively at its last meeting by extending its extended period language of low rates while also implementing a new open ended bond buying program. If nothing else this is testimony to the Fed's concern that the U.S. and the global economy is unhealthy, a concern that is being echoed by Central Banks worldwide.

With the Fed having acted, focus will now turn to the Presidential election and the looming fiscal cliff. The general consensus is that there will be some compromise to extend current law and modify spending cuts until a lasting formulation for fiscal discipline can be negotiated by the new President and Congress.

The consensus forecast for economic activity is for a reacceleration of growth and profits in 2013 premised on a fiscal compromise and the recent actions of the Federal Reserve. We hope this materializes but we have major doubts. Indeed, extracting from the fiscal cliff there could well be about $200-$300 billion of fiscal drag hitting the economy in the new year. Both the payroll tax cut and emergency jobless benefits are set to expire at year end, and there does not appear to be any appetite to extend them. Additionally high income earners will be hit with a 3.8% tax on investment income, a 0.9% tax on wage and salary income, and a Medicare surtax to pay for the health care law.

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