The ‘fiscal cliff’ is already dragging down GDP

October 26, 2012

Economic growth was better last quarter than analysts had expected, bolstered by higher consumer and government spending. But it could have been stronger if we weren't approaching the "fiscal cliff," economists say.


(COLIN ANDERSON/GETTY IMAGES/BRAND X)

Business investment fell by 1.3 percent in the third quarter — the first quarter it has dropped since 2009. Economists believe this is a sign that businesses are feeling wary about the fiscal uncertainty on the horizon and are starting to pull back. "The fact that investment in equipment and software was flat, and non-residential structures investment fell, is an indication that businesses are nervous about the outlook," says Gus Faucher, senior macroeconomist at PNC Bank. The manufacturing industry, for one, has a new report laying out other signs of a slowdown.

Mark Zandi, chief economist at Moody’s Analytics, believes that fiscal issues are already "the number one weight on investment," but notes that external factors like the weakening global economy and the euro-zone crisis are having an impact as well. What's more, he notes, some businesses may be holding back right now precisely because they want to take advantage of a tax code with higher rates. "If you are an S-chapter then the tax benefit of investing will be greater next year when your marginal tax rate is higher," he says.

That said, it's also notable which parts of the economy don't seem to be affected by the cliff yet: Consumers, for one, don't seem in particular, to be concerned. "The consumer numbers were decent, especially for durable goods, so it doesn't appear as if the cliff is causing households to re-evaluate their spending," says Faucher.

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Sarah Kliff · October 26, 2012