As the U.S. fiscal cliff morphs into a new federal debt ceiling confrontation over the first couple of months in 2013, it is essential that corporate management focuses on the behavioral economic impact -- not political score keeping. Last summer, Gallup correctly anticipated the potential for the fiscal cliff to disrupt the economy and compared the fiscal cliff politically to the debt ceiling battle that took place during the summer of 2011. Despite the potential for an immediate-term "rally effect" in the week following passage of the fiscal cliff "fix," Gallup's economic confidence data suggest slower growth and an increased likelihood of recession in 2013.
Washington is engaged in a game of "chicken" over automatic tax increases and spending cuts that is not only hurting the current economy but also threatening another recession -- or worse -- next year. Business leaders need to plan in case there is a grim outcome.
Americans want compromise on the "fiscal cliff."
The addition of Paul Ryan to the Romney presidential ticket is going to greatly increase the political focus on Medicare, Social Security, the federal budget deficit, and the fiscal cliff. In turn, just the intensity of these important national debates could have the unintended consequence of bringing today's slowing economy to a halt in the months ahead.
While many politicians and economists talk about the potential for another recession if the U.S. goes over the "fiscal cliff," few seem to recognize that the fiscal-cliff debate itself is already damaging the economy. This is shaping up to be a repeat of the 2011 debt ceiling debacle -- only worse. New Gallup economic data show:
The increase in the Thomson Reuters/University of Michigan Consumer Sentiment Index reported Friday morning aligns with what the Gallup Economic Confidence Index showed in January, and with what we anticipated the final Consumer Sentiment Index would show.
The post-election focus on the fiscal cliff has implications not only for the long-term economic outlook, but also for the immediate future. There is no better illustration of the real world impact of current policy debates than the way self-reported upper-income consumer spending has plummeted during recent weeks. While many investors may be taking profits now in anticipation of higher taxes, other upper-income Americans may be pulling back on spending in anticipation of lower after-tax take home pay in 2013.