Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United States
Euler Hermes
Falling over the ‘fiscal cliff’: why the short-term outlook is worrying
The U.S. economy still faces significant headwinds resulting in expectations of sub-par GDP growth and elevated unemployment for 2013. The Federal Reserve has started another round of quantitative easing (QE3) to help stimulate the housing market and the broader economy. However, QE3 is likely to have a very limited effect and uncertainty surrounding the fiscal cliff is likely to contribute to the weakness.
▶ Recent Developments The U.S. economy lost 9 million jobs in the recession and as of August 2012, more than three years since the recession ended, it has only recovered about half that amount. The unemployment rate, despite a recent decline, has remained above 8% for three and one half years and the labor participation rate is the lowest it has been in 30 years. GDP has been corres- pondingly weak, growing only 2.1% over the past four quarters. Manufacturing, which helped lead the eco- nomy out of recession, has been stumbling for seve- ral months, and while consumers have enjoyed some recent gains in income, consumption still remains weak. Positives have included surprisingly strong auto sales, a firming housing market, and fal- ling insolvencies.
▶Mixed perspectives for 2013 Looming events will make for yet another year of sub- par GDP growth in 2013 - around 2% - with unem- ployment most likely remaining near 8%. The uncer- tainty of the fiscal cliff at the beginning of 2013 is weighing on the economy. Even if a plan is devised to reduce the country’s debt, it will probably not have much effect until the middle of 2013 at the earliest. The fiscal cliff could push the economy into reces- sion. However, the most likely scenario is that most of the fiscal cliff will be avoided since both Republicans and Democrats believe that such a rapid fiscal contraction would be politically dangerous and
a serious blow to the economy. Yet uncertainty remains as the fiscal cliff issues may not be addres- sed entirely by e new session of Congress. On the monetary side, while QE3 is intended to boost
the housing sector by lowering mortgage rates, the plan is unlikely to help much since mortgage rates are already near historical lows. Risk-averse bankers have slowed the mortgage market, not high interest rates. Nonetheless, there has been some firming in several housing market measures such as prices and unit sales, but it is premature to call a bottom. Retailers are expecting slower holiday sales in 2012 compared to 2011. On an upbeat note, insolvencies are expected to fall 8% in 2013 due to positive, albeit weak GDP growth.
◾◾◾ Estimating the impact of the fiscal cliff > What: A combination of higher taxes and reduced
spending at the start of 2013, if current statutory provisions apply.
> How much: Fiscal tightening would amount to a good 4% of GDP in 2013 (5% of GDP, if changes in revenues and spending unlinked to specific policies are included). If the so-called “Bush tax cuts” are extended and automatic spending cuts (across-the-board spending cuts) under the Budget Control Act are avoided, fiscal tightening would be reduced to between 1.8% of GDP and 2.7% of GDP, respectively. Applying an overall fiscal multiplier of 0.75, the drag on GDP growth would amount to bet- ween 1.4% and 2%, respectively. > To put 2013fiscal tightening into perspective: General government net borrowing amounted to 8.7% of GDP in H1 2012, down from 10.25% of GDP in 2011.