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'Fiscal cliff' warnings rise to (overblown?) fever pitch

As the U.S. government propels itself toward a year-end “fiscal cliff,” the drumbeat warning of dire consequences is getting louder – in some cases maybe a little too loud.

Most economists agree the U.S. economy will almost certainly fall back into recession unless Congress makes changes to a package of automated tax increases and spending cuts agreed to last summer to break a deadlock over raising the debt ceiling.

The latest warning comes from the National Association of Manufacturers, which released a report Friday analyzing the economic impact of the looming package of higher taxes and sharp spending cuts.

“Even if the administration and Congress resolve the uncertainty before the end of the year, economic growth already has sustained significant damage,” the report concluded.

That view is supported by the latest numbers from the government on third-quarter gross domestic product, which showed weak spending and investment by companies unsure about the long-term impact of budget policy on their businesses.


U.S. gross domestic product expanded at a 2 percent annual rate in the three months ending in September, the Commerce Department said, accelerating from the second quarter's 1.3 percent pace. Though the improvement was welcome news, economists say growth of less than about 2.5 percent is too slow to make much headway in lowering the unemployment rate, currently at 7.8 percent.

The NAM analysis estimates that business leaders’ uncertainties about the fiscal cliff have cut GDP this year by 0.6 percent, or less than two-tenths percent per quarter, consistent with estimates from other private economists.

But the report, which features a foreboding cover-page image of dark clouds streaked with lightning bolts, goes further than most forecasters in laying out a worst-case scenario.

“The U.S. economy is bracing to take an immediate $500 billion hit on Jan. 1, 2013,” the report warns. “The ‘double whammy’ of across-the-board cuts in spending and federal tax increases will be large and sudden."

The fallout, the report warns, will create “dramatic” job losses of 6 million over two years,  dampen GDP by 12.8 percent through 2015 (or about 4 percent a year), send the jobless rate to 11 percent and cut personal disposable income by almost 10 percent by 2015.

Though plausible, the scenario assumes that the next Congress and president sit idly as the economy plunges into a deep recession. Despite the deep political dysfunction that created the fiscal cliff in the first place, few private economists or political analysts expect no action whatsoever on the budget impasse for the next three years.

While continued uncertainty is certainly likely – and will hold back growth – the process of defusing the fiscal cliff time bomb is fairly easy to do once Congress agrees to do it.  At any point before Dec. 31, Congress can repeal the or delay the so-called "sequestration" as negotiations continue on a new budget plan.

And while sequestration calls for 10 percent cuts in spending for the current fiscal year (which ends Sept. 30) it doesn’t mandate immediate cuts in spending on Jan. 1, 2013. Government departments and agencies have until the end of the fiscal year to hit the 10 percent spending reduction target. Some may delay implementing cuts in hopes of a deal later in the year.

The same holds for tax increases, which would rise by about a total of about $400 billion, spread out over the remainder of the fiscal year. The economic hit would be gradual -- about $10 billion a week, or 2.6 percent of GDP -- and continue only as long as the budget impasse remains unresolved.

"If we don't do something about the fiscal cliff ... we're looking at an overwhelming likelihood of serious recession, and we're looking at a real threat to national security,' said Lawrence Summers, Harvard University professor.

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