‘Fiscal cliff’ fight already drags on U.S. economy

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“The effects on U.S. economic growth from political uncertainty were well documented during last year’s debt-ceiling debate,” he said. Consumer confidence took an unprecedented hit, plummeting by half in response to the political turmoil and a first-ever downgrade of the U.S. credit rating by Standard & Poor’s Corp. in August.

Businesses slowed their purchasing and hiring decisions in a major way, just like they appear to be doing this year.

Said Mr. Silvia, “We believe a similar effect is possible on both consumer and business confidence in the fourth quarter of this year if policymakers wrangle over how to continue the bulk of existing policies for a prolonged period. A short-term patch would then result in a second wave of reduced business and consumer confidence as the new Congress and potentially a new administration attempt to determine a more long-term solution to the currently unsustainable fiscal situation.”

Frederick Cannon, analyst at Keefe, Bruyette & Woods, said the greatest damage to the economy could occur around the Christmas holiday if, as he expects, Congress postpones action on the fiscal deadline until a lame-duck session after Thanksgiving.

“December has the highest monthly level of discretionary consumer spending in the U.S., and the contentious debate over the fiscal cliff in that month is likely to damage consumer confidence,” he said. Moreover, the stock market is likely to get drawn into the maelstrom, as Congress often dallies over deadlines until it sees a major reaction in the stock market that forces it to act.

“It is likely that resolution happens as a result of the stock market declining significantly, thus investors need to prepare for a sell-off,” he said.

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