At the brink: Plunge over ‘fiscal cliff,’ or economic leap up?
The economy is finally breaking free of the slow, inconsistent recovery it has been experiencing for more than three years, economists say, but it might well run right off the “fiscal cliff” if lawmakers fail to come to agreement, undoing much of the progress achieved to date.
The government on Friday reported strong sales of computers, machinery, cars and other electronics. Other data showed that Americans’ incomes are growing more quickly than they have been, providing critical support for additional spending.
The developments capped weeks of good economic data, giving rise to hopes that the economy is gaining enough momentum to enjoy a robust recovery in 2013. The housing market, long the weakest part of the economy, is enjoying a broad rebound, and other signs also are pointing up.
Yet 31 / 2 years after the end of the recession, there is a grave risk that the economy will be undermined at just the moment it is showing serious signs of recovery.
“We’re at this moment where the economy is poised to return to a better growth environment if Congress could just get out of the way,” said Tim Quinlan, an economist with Wells Fargo.
Stock markets declined modestly Friday on fears that lawmakers wouldn’t find a way to avoid the fiscal cliff. The Dow Jones industrial average fell 120.88 points, or 0.9 percent, to 13,191, while the Standard & Poor’s 500-stock index fell 13.54 points — also 0.9 percent — to 1,430.
If it weren’t for the threat of going over the fiscal cliff, economists say, the recovery would enter its strongest year to date.
“Underneath all the uncertainty and all the fiscal cliff issues, the economy is starting to gain some steam and build some strength,” said Paul Edelstein, an economist with IHS Global.
President Obama made the argument Friday that this is not an opportunity to waste.
“Just as our economy is really starting to recover and we’re starting to see optimistic signs, and we’ve seen actually some upside statistics from a whole range of areas, including housing, now is not the time for more self-inflicted wounds — certainly not those coming from Washington,” he said.
It is widely expected by economists that a prolonged glide over the cliff would push the nation into recession, sending the unemployment rate back above 9 percent. The cliff consists of $500 billion worth of sharp tax increases and spending cuts affecting nearly all Americans.
The government reported two pieces of good news Friday: Spending by consumers rose 0.4 percent in November and, critically, incomes rose 0.6 percent. Throughout the economic recovery, even as consumers have continued to spend, they have been constrained by stagnant incomes. If incomes begin to rise, that should support more spending, which makes up the lion’s share of economic activity.
Another positive development was a report indicating that orders for durable goods — cars, computers, machinery and other manufactured items — rose by 7 percent last month.
Those positive data points built on other recent encouraging data. One particular bright spot has been the housing market. In recent months, housing prices have been increasing at a rapid clip. In previous years, even as some economic indicators were taking off, housing remained a drag.
“Maybe now is the time we’re hitting escape velocity,” said Michael Feroli, an economist with JPMorgan Chase. “Probably the biggest difference is housing is finally getting going. In the previous periods we had good growth . . . but it’s always been housing that hasn’t fallen into place. But that’s different this time.”
Some see the economy just at the edge of faster growth.
“We’re at a tipping point,” said Diane Swonk, chief economist at Mesirow Financial. She said the nation could absorb slightly higher taxes and less spending, but not the massive drag of the fiscal cliff’s components. “A little bit of fiscal drag would be painful, but we could overcome it because there’s more momentum in the recovery.”