In geological circles, they are known as foreshocks, or the small tremors that often precede a much larger earthquake. And right now, the threat of year-end tax increase and spending cuts (often referred to as the Fiscal Cliff) is causing foreshocks in our economy, before the actual event has occurred.
"It is clearly fear, or at least uncertainty, before the reality sets in," says Hugh Johnson, Chairman and CIO of Hugh Johnson Advisors in the attached video. "Nobody knows if their taxes are going to go up or if it's going to be postponed and they'll stay the same."
It's a problem that is not only affecting individuals, but businesses too because as Johnson says anytime you have uncertainty, it creates inaction which in turn becomes a drag on the economy. It's hard to say exactly how much additional headwind is coming specifically from Fiscal Cliff fears, but Johnson and others have ratcheted down their already soft Q3 and Q4 GDP estimates at least in some part due to this self-made crisis.
And it's not just GDP that's taking a hit. Johnson says it's also cutting into jobs and confidence too.
"There's no question that this serves as a drag on corporate hiring and shows up in the employment numbers," Johnson argues, adding that "confidence would soar if Washington ever got its act together." Unfortunately, he pegs the odds of that happening at 100-to-1.
While many would argue that it's too late to act now with just over 4 months left in the year, Johnson would argue otherwise, saying Congress should take took action now on tax, spending and entitlement reforms.
"You bet that would help confidence, and you bet that would help consumer spending, and you bet that would help corporate spending and investment!" Johnson boasts. "That would do a lot to galvanize this economy and improve the U.S. economy. You bet it would help."
