10/2/12 – The Sky Is Fall- . . . Wait, Never Mind?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Oct 2, 2012 12:17:10 PM

and tagged Fiscal Cliff, Politics and the Economy

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We certainly are not free of the fiscal cliff, but it is at least comforting to know that our representatives are taking up the matter when they have a free minute. The New York Times (NYT) reports today on the front page, with “Senate Leaders See Path to Avert Mandatory Cuts,” that the Senate, the less irresponsible body, is “closing in on a path” to deal with the problem.

As well they should be. In addition to the 160 million people to be affected by the fiscal cliff mentioned in an article yesterday (“Payroll Tax Rise for 160 million is Likely in 2013,” NYT, p. A1), today the Financial Times (FT) has “Washington’s fiscal cliff to hit 90% of families, claims think tank” on page 3. That’s a lot of voters.

The interesting part about this is not that Congress is talking—because everyone is still far apart, and the House remains very unwilling to even talk about raising taxes. The interesting part is that the fallback plan, on a bipartisan basis, is to resurrect Bowles-Simpson as the long-term deficit reduction plan, along with voting to put off the automatic spending cuts of sequestration.

The reason I find this interesting is due to an advisor conference call that Commonwealth had recently with a political analyst in Washington. This analyst made the point that, in fact, we have had several very close calls on bipartisan resolution of the deficit issue—the two most well-known being the Bowles-Simpson plan and the failed Obama-Boehner deal. His main point was that there is a deal to be had—one that can pass muster with both parties. This is a politically solvable problem. The fact that the Senate is explicitly looking to resolve the issue using Bowles-Simpson as a template suggests first, that the analyst is right, and second, that Congress may finally be getting serious.

Of course, like Saint Augustine, the Senate is asking for virtue—but not just yet. The article goes on to specify that no deal is expected until after the election, and any results will depend largely on who wins. Still, the fact that someone thought to float a trial balloon in the NYT suggests that at least the discussions are somewhat serious. Half a loaf—or the promise of talks about half a loaf—is better than none.

Even in the face of continuing uncertainty, though, green shoots continue to appear in the U.S. The latest is seen in “Industry helps US economy stand out in a sluggish world” from the FT (p. 6) and “Factories Notch Gains, Bucking Global Slump” from the Wall Street Journal (WSJ) on page A8. U.S. manufacturing surprised to the upside, with the best results in four months, despite the slowing global economy. This is not a sign of robust growth, but it still highlights the relative strength of the U.S. economy, and suggests that once some of the clouds start to part, we may be poised for faster growth.

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