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  • jpmlondonwhale jpmlondonwhale Nov 9, 2012 2:06 PM Flag

    Expect A Recession In 2013 Without A Quick Fix To The Fiscal Cliff

     

    Expect A Recession In 2013 Without A Quick Fix To The Fiscal Cliff


    Stocks received a beating today, as a new, non-partisan government report reaffirmed a forecast for recession in 2013 without a solution to the fiscal cliff. (Image credit: Getty Images via @daylife)

    The U.S. would slide into recession next year and unemployment would rapidly increase without a compromise on the fiscal cliff.

    That’s the grim picture portrayed in a new report from the non-partisan Congressional Budget Office. The combination of spending cuts and tax increases would crush the fledging recovery—sending economic activity down by 0.5% and the jobless rate to 9.1%; a dire set of circumstances that underscores the need for an immediate solution.

    “Cliff-related uncertainty already has arrested business spending and prospects of a delayed solution are eroding financial conditions well ahead of yearend,” says Citi economist Robert DiClemente. “The need to raise the debt ceiling in the first quarter of 2013 could prove a costly mechanism for resolving gridlock.”

    Should the U.S. fail to reach a solution, federal income, dividend and capital-gains tax rates increase Jan 1. Estate tax rises, too. And $110 billion will be cut from federal spending on defense and other domestic programs, the first installment of $1 trillion in cuts through the next decade, all promised in last year’s deficit deal.

    The report by the CBO, which had previously warned of a recession next year, is full of unpleasant realities. Example: Debt held by American compromises 70% of annual GDP, the highest level in more than 70 years. Spending at this current level would push debt to 90% of GDP by 2022.

    Significantly, if there’s no action, and America moves ahead with the $1 trillion in cuts, the budget balances by 2020, and debt-to-GDP steadily dwindles. However, it’s clear that the short-term prospects will force Washington, D.C. to some resolution.

    Today’s stock market shows what talk about the cliff can do. Already mired in the red this morning, stocks fell further after the report’s release. The Dow Jones industrial average dropped 0.9% to 12,811.32, the second consecutive day that the blue chip index finished by the 13,000 mark. The S&P 500 declined 1.2% to 1,377.51. And the Nasdaq composite lost 1.4% to 2,895.58.

    Energy stocks gave up the most. Schlumberger surrendered 3.4%. Exxon Mobil lost 1.3%. Chevron retreated 1.5%. And capital goods also experienced a broad declined: Caterpillar fell 1.6%, as Deere lost 0.6%.

    At the heart of the problem: “Many of the options that would have a substantial budgetary impact would require large numbers of people to pay more in taxes or receive less in government benefits or services,” according to the CBO. This means asking people to pay more taxes to afford entitlement programs or ask those programs’ recipients to take less.

    It means a fierce debate in Washington, D.C., over strongly held beliefs on these issues. Though, if today’s market reaction serves any measure, a debate that fails to reach any conclusion could be as damaging as a bargain.

    This topic is deleted.
 
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