The Financial Cliff and the Debt Ceiling by Tim McLaughlin
I have received a great many eMails regarding “could you comment on the imposing ”˜financial cliff’ event and how that impacts the debt ceiling”. Based on that, here is an attempt to explain where we are and where we may be heading in basic terms:
Incoming economic reports during the past month point to a pickup of economic growth in the third quarter from the second quarter. However, the improvement is due largely to a downward revision in growth in the second quarter. Most economists see no meaningful improvement in growth in the second half of this year from the subdued pace experienced during the first half, with projected growth remaining below 2 percent. Despite an additional easing by the Federal Reserve, risks remain tilted to the downside. The European debt crisis and looming fiscal cliff and debt ceiling debate continue to present the strongest headwinds to the near-term outlook. With the start of 2013 in sight, there remains extraordinary uncertainty regarding the extent of fiscal contraction, which, if it occurs as mandated under current law, would likely end the economic expansion.
While most analysts assume a delay or an extension in most of the looming tax and spending changes, no consensus exists regarding how Congress will accomplish such tasks, especially before the election. Following the balloting, current members of Congress, even those who have lost their elections, should return to work by mid-November and serve out their terms until the end of the year. The new Congress will start on January 3, and the next presidential term will begin on January 20. The transitional period before the old and the new Congress, known as the “lame duck session,” makes it extremely challenging for lawmakers to resolve the fiscal cliff issues by year end. Most believe that a short-term extension is the most likely scenario, but a temporary lapse with retroactive extension next year also is possible. The latter could lead to turmoil in the financial markets and a substantial erosion of business and consumer confidence.
So the takeaway is that it may not depend as much from a “financial cliff/tax extension” perspective on who is elected President in 11 days, but, rather, what the shape and the majority is in the House and the Senate when we wake up on November 7th.
