Are fears of the fiscal cliff hurting the economy? Maybe not.

September 24, 2012

Lately, there have been a series of news stories about how the U.S. economy is getting dragged down by fears of the looming "fiscal cliff"—that batch of tax hikes and spending cuts scheduled to take effect in 2013 if Congress doesn't act soon. 


Fiscal cliff, eh? (The Washington Post)

Much of the evidence, however, has been anecdotal. Back in August, the New York Times ran an interesting story about how a handful of companies were already going on hiring freezes or cutting back on investments out of fear for fiscal Armageddon. For example: "Hubbell, a maker of electrical products, has canceled several million dollars’ worth of equipment orders and delayed long-planned factory upgrades in the last few months." Similarly, a survey of economists in the Wall Street Journal found that most experts thought fiscal cliff worries would hurt growth this year.

And perhaps Congress's dilly-dallying on the fiscal cliff really is creating a spate of economy-crushing uncertainty. So far, however, it's hard to see in the data. Over at Real Time Economics, Ben Casselman passes along this chart suggesting that we're not yet seeing an uptick in mass layoffs. In fact, August saw slightly fewer mass layoffs, involving 50 or more workers, than July did:

Military contractors have warned that they will soon have to lay off employees en masse thanks to the impending fiscal doomsday. After all, many of the budget cuts that will come in 2013 will hit the defense industry hardest, unless Congress changes the law. So far, however, that uptick in layoffs hasn't arrived.

Meanwhile, Cardiff Garcia of FT Alphaville recently passed along this research note from Citigroup looking at the investment patterns of 700 non-financial public companies. It was hard to detect much fiscal cliff fear here:

However, there is no evidence that such investment retrenchment is occurring and there is some proof that companies already have increased their spending intentions modestly, with a probable working assumption that Washington will figure things out before the bad news hits.

Figure 1 illustrates the planned investment by sector and in aggregate of nearly 700 companies that Citi’s equity research analysts cover in the U.S. Most critically, the aggregate capex [capital expenditure] now is expected to climb more than 13% in 2012 versus 2011 levels and compares with about 11% when the same review was done in the May/June time frame. Hence, despite all the angst, it seems as if management teams have bumped up their spending intentions.

And, since we're in the hazy journalism business and need three data points to make a trend, here's a September survey of investors from the Center for Audit Quality:

* 70 percent of investors believe that the American economy will either stay the same or improve over the next year; only 20 percent  believe it will get worse.

* 25 percent of investors expect their personal financial situation to improve, and 64 percent expect it to stay the same  over the next year.

So far, it's hard to find signs that agonizing over the fiscal cliff is hurting economic growth. One possibility is that it's just way too soon to tell, and we'll start seeing layoffs in October or November. Or perhaps most businesses figure that Congress will find some way to avert those tax hikes and spending cuts after the election, even if things get tense and the haggling goes down to the deadline.

Related: The case for jumping off the fiscal cliff.

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Ezra Klein · September 24, 2012