12/14/12 – The Economy Slowly Continues to Improve, Despite Washington

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 14, 2012 9:46:49 AM

and tagged Fiscal Cliff

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Probably the best description of a movie I’ve ever read was of Independence Day, a great science fiction B movie. (If you haven’t seen it and you like that sort of thing, take a look.) The description goes, “Space aliens come and destroy Washington, D.C. But later on, it turns out they are hostile.”

I think of that every time I look at the performance of the economy, which is recovering, and then read the headlines about the fiscal cliff negotiations, or lack thereof. There are certainly risks out there that could derail the recovery, but it’s maddening that the biggest one is our own government.

Good news over the past week or so: initial unemployment claims dropped again, job postings are up, average wage income is up, and manufacturing has ticked up after Sandy. Housing continues to improve, and consumer spending is on the rise even as people get more worried about the fiscal cliff. There is a lot of good out there, despite all of the uncertainty; I imagine that, were the uncertainty to be resolved, things might get even better.

Unfortunately, we are a long way from that and only appear to be getting further. Boehner is headed home to Ohio this weekend, so there will be no weekend negotiations. We’re getting very close to what I understand is the deadline for introducing legislation, December 18, although I suspect that could be fudged. We’re hearing more and more in the press from those on both sides who say a bad deal is worse than no deal. Looks like we may find out.

Worst of all, the fiscal cliff, as much of a problem as it could be, actually isn’t the thing I am most worried about. That would be the pending debt ceiling negotiations. If Congress and the White House can’t come to terms on the fiscal cliff, with enormous political incentives to do so, they probably won’t find the debt ceiling negotiations any easier.

You may remember the last round, in 2011, when the U.S. almost went into voluntary default because Congress and the White House couldn’t agree, and only a last-minute deal cut between the Senate and the House saved us. The price of that deal is the current fiscal cliff, which was designed to handcuff the White House and Congress into reaching an agreement. It isn’t working out that way, and we won’t have that option this time.

So, that’s why I’m much more worried about the debt ceiling. The fiscal cliff is a problem, but one with a silver lining—actual deficit reduction. We pay a price, but we get a benefit. The debt ceiling negotiation will be a problem with absolutely no silver lining.

Stay tuned. The fiscal cliff debates are the trailer, but the debt ceiling will be the movie. Judging by the trailer, it should be quite a ride.

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