Some 90% of economists questioned for the monthly Bluechip survey believe there will be a ‘moderate’ or ‘small’ impact to US economic growth in the second half of this year resulting from the threat of the ‘fiscal cliff’ the US faces at the end of 2012. Beginning in January 2013, US taxes are scheduled to rise sharply and federal spending is set to be cut sharply unless Congress takes action by the end of this year.
A delay in reaching an agreement until after the November elections is very likely to chill business investment and hiring for the next several months. Businesses are very likely to be unwilling to investment in more capacity if consumers won’t have the money to buy the products.
US production and capacity utilization totaled 78.9% in June according to the latest report from the Federal Reserve, about 1.3% below the long-term average (1972-2011), though well above the 66.8% utilization rate at the low point in 2009 and below the high of 85.2% in 1988-89. Since June 2011 growth in capacity utilization has been just 2.3%.
There’s little reason for new business investment if production capacity is already under-utilized, so the Bluechip economists are not telling us anything we shouldn’t already have known. And as for the impact of higher taxes combined with cuts in government spending, that too has been blindingly obvious for a very long time.
Still, the consequences of falling off the fiscal cliff bear repeating. Maybe someone in the corridors of power will finally catch on.