Surprise! The economy did fine despite the fiscal cliff talks.

January 28, 2013

Two pieces of news Monday morning show a corporate sector that was in an expansionary mode at the end of 2012. Companies seemed to have ramped up their spending on big, heavy, long-term investments as the year came to a close. And that, coupled with some other recent numbers, point to one of the more promising trends for the economy in 2013. There are growing signs that Washington's dysfunctions are less of a drag on the economy than many of us thought.

The Commerce Department said that durable goods orders rose a surprisingly strong 4.6 percent in December, and that orders for non-defense capital goods excluding aircraft—a handy measure for investment spending, rose 0.2 percent.

And while Caterpillar, the giant maker of construction equipment, reported lower fourth quarter sales and profits than a year earlier, the numbers held up better than analysts had expected, and for the full year 2012, the company recorded a whopping 10 percent gain in sales and 15 percent in profits.

Presumably Caterpillar's 10 percent gain in 2012 sales was driven by bigger items than these. Presumably Caterpillar's 10 percent gain in 2012 sales was driven by bigger items than these.

But rather than look at these developments in isolation—if nothing else, they should offer some hope that the fourth quarter GDP number to be released Wednesday will be a bit better than analysts have feared—the solid levels of business investment spending fit a broader theme.

In November and December, there was a widespread fear that the tense negotiations over resolving the “fiscal cliff” was, by sapping business and consumer confidence, having a real and damaging impact on the economy even in advance of any actual spending cuts or tax increases resulting from going over the cliff. “The damage may already be done,” said the Wall Street Journal in a Dec. 30 piece headlined “Signs of Negative Economic Impact Growing.”

Some jerk at the Washington Post wrote on December 11 that “The evidence is mounting that American consumers and businesses are starting to seriously sweat the fiscal cliff,” citing a survey of small business optimism that took a dive.

It is true that both consumer and business confidence surveys suffered some in December, and that the stock market was a little jumpy for a couple of days (though nothing like in some episodes of uncertainty in the recent past). But now more solid major November and December economic data is in. Given that a deal was not reached to resolve the cliff until New Year’s Eve, this is data that covers entirely the period before there was confidence on what a deal might look like.

If you think businesses were so petrified of the fiscal cliff that they stopped hiring, well, private sector employers added 171,000 jobs in November and 168,000 in December, which is if anything a little better than the trend over the last several months.

If you think businesses held off on buying equipment, fearful of the nation falling off the fiscal cliff, well, see above. The 0.2 percent gain in orders for nondefense capital goods excluding aircraft in December followed a 3 percent rise in November.

If you think consumers, petrified by what their leaders in Washington were doing, held fast to their wallets, well, retail sales rose 0.4 percent in November and 0.5 percent in December.

Might homebuilders have taken a pause on starting new construction, worried that a recession could damp the emerging recovery in the sector? Well, no, the number of December housing starts was the highest since June 2008.

The dire scenarios many of us sketched out for how the economy would react to the fiscal cliff debate just didn’t come true. The U.S. economy kept humming along at the end of 2012, despite the noise from Capitol Hill.

The first reaction to that should simply be a bit of relief. But there’s a bigger lesson. We seem to have entered a phase in which brinksmanship over fiscal policy has receded into background noise for economic decision-makers. It may not be a good thing, but it is not showing up in the form of significant economic dislocation.

The people who make investment decisions—whether in the CEO suite of the largest companies or individuals weighing whether to buy a house or go shopping—seem to be accepting that the standoffs between the White House and Congressional Republicans over the nation’s finances are just going to be a part of the backdrop for the forseeable future, and that ultimately the two sides will strike deals that do not devastate growth.

That could change if the brinksmanship fails, if for example the sequester fully takes place and automatic spending cuts are enacted that could subtract perhaps 0.7 percent from GDP growth.

But it’s a worthwhile reminder that we’ve seen economic decision-makers shrug off drama in Washington before. In the mid-1990s, there were two government shutdowns and a series of jaw-clenching standoffs between House Republicans led by Newt Gingrich and the Clinton administration. And that was a pretty good decade, despite it all.

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