The Exchange

JPMorgan Adjusts Estimates for Bigger Fiscal Cliff Impact

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JPMorgan economist Michael Feroli said Thursday he no longer believes that the U.S. payroll tax holiday will be extended -- a change he estimates will ultimately reduce GDP growth in 2013 by just more than half a percentage point, adding to the impact of fiscal-cliff related issues.

"... the change in our view wasn't because of something that happened, but rather what didn't happen: few in the political establishment came forward to push an extension of this tax break," according to a research note that dealt specifically with fiscal cliff related issues.

The expiration of the payroll tax cut would increase payroll taxes and reduce household disposable income by around $125 billion next year, according to Feroli. That could translate to a reduction in consumer spending of as much as $100 billion in 2013, according to his projections.

He mentions, however, there is debate about the exact effect of different sorts of tax breaks (and their removal) based on timing, economic conditions and design -- lump sum vs. deductions from monthly paychecks, for instance -- and how much Americans will spend as a result.

"Overall we now see cliff-related fiscal issues subtracting about 1%-pt from growth next year, up from our prior assessment of 0.5%-pt," he writes.

As a result, JPMorgan now expects annualized real GDP growth to be 1% in Q1 and 1.5% in Q2, down from 1.5% and 2.25%, respectively. One positive: Feroli also included an upward revision to the expectation for the third quarter of 2012, to 1.8% from 1.4%. That data will be released next Friday.

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