Fiscal cliff already hampering U.S. economy, report says

The “fiscal cliff” is still two months off, but the scheduled blast of tax hikes and spending cuts is already reverberating through the U.S. economy, hampering growth and, according to a new study, wiping out nearly 1 million jobs this year alone.

The report, scheduled for release Friday by the National Association of Manufacturers, predicts that the economic damage would deepen considerably if Congress fails to avert the cliff, destroying nearly 6 million jobs through 2014 and sending the unemployment rate soaring to near 12 percent.

Across the nation, companies are bracing for the fallout by laying off workers, letting jobs go vacant and postponing major purchases. Commerce Department data released Thursday show business investment stalled in September, as orders for core capital goods such as machinery and equipment plateaued at $60.3 billion.

“The general consensus is things are going to get a lot worse as people expect this fiscal cliff to be on us,” said Thomas Riordan, chief executive of Neenah Enterprises in Appleton, Wis., which makes cast-iron products such as truck axles and manhole covers.

The company has eliminated about 150 jobs over the past few months, and four of its six plants have begun operating on short workweeks. Like other business owners, Riordan expressed extreme frustration with Washington’s failure to deal with the looming crisis, leaving momentous decisions about the economy until after the Nov. 6 election.


Over the fiscal cliff

“Everyone is blaming everyone else as the country grinds to a halt,” he said. “I don’t think the political leadership in this country has an understanding of how long it could take to turn this boat around.”

The term “fiscal cliff” is Washington shorthand for an array of policies set to take effect in January, sucking more than $500 billion out of the economy next year. That includes about $100 billion in automatic cuts to the military and federal agencies, adopted by Congress last year as part of a plan to reduce record budget deficits. It also includes about $400 billion in tax hikes, caused primarily by the expiration of a temporary payroll tax cut and other tax breaks adopted during the George W. Bush administration.

All told, the cliff amounts to the largest spurt of deficit reduction in more than 40 years. But it is also likely to push the fragile economy back into recession, according to the nonpartisan Congressional Budget Office. The CBO predicts that a recession would be significant but brief, with unemployment peaking around 9 percent and economic growth recovering during the second half of 2013.

The projections in the NAM report — prepared by Jeff Werling, executive director of the Interindustry Forecasting Project at the University of Maryland — offer a substantially darker view of the consequences of inaction, joining others who have questioned CBO’s relatively benign assessment.

Mark Zandi, chief economist at Moody’s Analytics, projects that unemployment will peak at more than 9 percent in a forecast that closely tracks that of the CBO. But he said: “The risks are decidedly to the downside. Given the economy’s extraordinary fragility and that the Federal Reserve is increasingly out of options, it isn’t hard to construct scenarios in which recession would be deep enough to raise the unemployment rate into the double digits. Policymakers would be taking a big risk going over the fiscal cliff.”

NAM is an advocacy organization and commissioned its report to persuade lawmakers to take action to avoid the cliff. Judging from the experience of NAM members and other data, Werling argues that anxiety about the cliff is already having an effect.

“We’ve probably already lost 0.5 percent of GDP growth in 2012, just from the fiscal cliff hovering over our heads,” Werling said in an interview. “People are taking precautionary measures. Even if you think there’s not much of a chance of this happening, businesses and consumers are still worried.”

Anecdotal evidence abounds, particularly among companies associated with the defense industry. The Pentagon budget is set to take a hit of nearly $55 billion in the fiscal year that ends next September, on top of other scheduled reductions. Defense contractors are already hunkering down.

Preparing for the worst, Mike Kelly, president and chief executive of Ann Arbor-based Nano­cerox, a supplier of advanced materials for laser systems, missile optics and radiation detection, said he embarked on an aggressive cost-containment strategy nine months ago. Kelly laid off four of his 22 employees and converted them to contract workers, froze salaries, renegotiated health benefits and tightened controls on spending.

Kelly said he’s also trying to shift business away from the defense industry and into the commercial marketplace. But lenders and investors have no interest in financing his expansion.

“When you tell them you’re an advanced materials company and your main client is the military, they run,” Kelly said. “We started nine months ago envisioning that we’d be in a world of hurt right now. And unfortunately, we bet right.”

Kellie Johnson, chief executive and owner of Ace Clearwater Enterprises in Torrance, Calif., said her business is also suffering. The maker of custom parts for the aerospace and power industries survived the recent recession on the strength of military orders from the U.S. government and abroad, Johnson said. She predicted 7 percent growth in revenue this year. But then this summer, “the orders just stopped.”

“Now it looks like we’ll be 4 percent less than last year,” said Johnson, who has stopped filling open positions in her 192-person firm and canceled a $500,000 equipment order. Instead of doing readiness surveys to measure her capacity to ramp up production, she said, potential customers “this year are coming in and doing risk mitigation, asking, ‘Hey, if these defense cuts go through, how are you diversifying? Are you going to be around in a couple years?’

“Honestly” she said, “this is the first time in my career that I have been so extremely concerned about the future of my company.”

While concern about the cliff is rising, a consensus about how to handle it has been elusive. President Obama and other Democrats have threatened to block action on the cliff unless the Bush-era tax cuts are allowed to expire on income of more than $250,000 a year. Republicans, including presidential candidate Mitt Romney, want to maintain current tax rates for another year to give Congress time to tackle more far-reaching reforms — a position supported by the manufacturing association.

But on Thursday, a group of 80 high-profile chief executives said they are willing to accept higher taxes — accompanied by “significant spending restraint” — as part of a long-term plan to tame the $16.2 trillion national debt. Enacting such a deal, they said, would not only avert the cliff, but would also boost market confidence and perhaps spur economic growth.

“We can do this in a 10-year plan that doesn’t damage the fragile recovery,” Honeywell chief executive David Cote said during a news conference at the New York Stock Exchange just before the market’s opening bell.

Suzy Khimm contributed to this report.

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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