Over the past couple of weeks, I have been looking at the day-to-day evolution of the fiscal cliff negotiations and spending quite a bit of time talking about trees. When I did the 2013 outlook series, I did a lot of forest gazing, trying to figure out the bigger picture for the economy and the markets. Now is probably a good time to combine the two and look at the bigger picture of the fiscal cliff and what it means for the U.S. government and economy.

To try to estimate where the real economy will be in 2013, we must first consider where growth might come from. Consumer spending is approximately 70 percent of the economy, so this will be the first area we consider.

In the fiscal cliff debate, both sides have started to take off the gloves and trade offers. Boehner threw in the first bid, offering to accept higher rates on incomes over $1 million, and Obama said that he might be willing to move the bar above the $250,000 he’d been holding at. Obama’s most recent bid is for a $400,000 threshold. So we’re getting much closer.

On spending cuts, there’s been less progress. The President has ignored a Republican proposal to increase the Medicare eligibility age to 67. Not no progress, though, as Obama did accept a GOP proposal to use a different inflation formula for benefit calculation. This is important because it will result in big cost reductions (and benefit reductions) over time.

At the end of 2012, the U.S. economy finds itself, almost, at the beginning of a sustainable recovery. Consumer spending has recovered to levels above previous highs and is on par with recoveries from previous recessions. Retail sales are also doing well. The housing market has turned, with most markets reporting price increases year-on-year, and the number of houses for sale in most markets is below historical averages, suggesting that price appreciation will continue.

That’s an unfair headline, but what the heck. The big political and economic news in the U.S. this weekend was Speaker Boehner’s offer to allow higher tax rates on those making more than $1 million per year. That at least was the headline. But buried in the proposal was something more significant—an offer to extend the debt ceiling for at least another year or so.

The GOP—at least the portion of it not in safe, gerrymandered districts—is starting to recognize that, if the country does go off the cliff, the Democrats will get a lot of what their base wants—higher taxes, especially on the “rich,” and lower military spending—and the Republicans will get blamed by the Independents. Sure the country will suffer, but from a political point of view it doesn’t get much better than that for the Democrats. Boehner, who is speaking for the wing of the GOP that will be exposed in the next election cycle, is trying to cut a deal—or at least look as if he is doing so. As predicted, this is coming at the last minute.

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.

So the big story today is that the Federal Reserve is now explicitly linking its interest rates to U.S. unemployment. It’s kind of the reverse of the Santa revelation. Remember when you found out that Santa wasn’t real? How you kind of knew it but weren’t happy to have it confirmed? Now we kind of knew that the Fed was keying on unemployment, but again we’re not all that happy to have it confirmed.

The story made the front pages of the Financial Times, the Wall Street Journal, and the New York Times, in all cases above the fold. So in the eyes of the mainstream—and especially the financial—media, this is a big deal. I agree, for a change. The Fed has explicitly moved toward supporting the real economy, in employment, and away from supporting the financial economy, with inflation. Clearly, it is worried more about the former than the latter.

I have spent quite a bit of time reading, thinking, and writing about the fiscal cliff, going into its potential risks and damage in some depth. While it’s certainly appropriate to analyze the situation, something occurred to me the other day: Could this be another Y2K?

You may remember it—the disaster that didn’t happen. Despite the predictions of nuclear power stations melting down and airliners dropping from the sky, the millennial New Year celebrations went just fine, and the world was still there the next day.

I have written before about the disconnect between consumers, who have been spending as if the fiscal cliff didn’t exist, and business, which has cut back. That disconnect is starting to disappear as consumers become aware of the cliff and what it could mean.

Consumer confidence showed a material drop at the end of last week, due largely to growing public awareness that after-tax incomes will take a hit if the cliff isn’t averted. Other factors included gas prices and the stock market, both of which hit the expectations component. Looking forward, if confidence stays lower, we can expect consumer spending to drop as well—a problem, as it has been a major sustaining element of the recovery. A front-page story in the Wall Street Journal, “Consumer Spending Wobbles,” notes that spending was slower over the summer than previously believed and has continued to weaken into the end of the year.

Today, we will talk a bit about the cliff, but I wanted to lead off with recognition that, despite the short-term risks, there is still a lot of good out there, and the stories keep coming to prove it. A front-page article in the Wall Street Journal, “US Gas Exports Clear Hurdle,” and similar story on the front business page in the New York Times, “Exporting Natural Gas Has Merits, Study Finds,” both talk about a Department of Energy study, which concluded that exporting natural gas would be an economic plus, overall.

Such exports would help enormously with the trade balance; they would also create many jobs for people involved in constructing and operating the infrastructure to facilitate such exports. The costs would include the potential for higher prices domestically, as well as the possible erosion of a domestic cost advantage for manufacturers.