Dancing On the Fiscal Cliff

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It's all about the ‘Fiscal Cliff’ at this stage – and rightly so. One could argue about how good or otherwise the pace of current economic growth is, but no one doubts it will be in far worse shape should the spending cuts and tax increases take effect.

 

The consensus view is of an 11th hour deal that helps avoid the bulk of the fiscal changes from taking effect in 2013. The opening positions from both sides look far apart on surface, but they do have the building blocks that should form part of the final deal. That said, there is still room for miscalculation on both sides that has the potential of pushing us over the ‘cliff.'  

 

Business confidence appears to have taken a hit from the domestic fiscal uncertainty and the weak outlook for global economic growth. One could blame Monday’s sub-par ISM reading on the effects of Sandy, but the measure was hardly in robust shape even before the storm. In fact, the ISM reading had come out of contraction mode only in September after going below the 50-level in the summer months.

 

Recent trends in business spending have been bearing out this weakening backdrop. We will likely see this in reduced hiring numbers in the November non-farm payroll data coming out this Friday as well. Sandy will undoubtedly have a hand in bringing down the jobs numbers this Friday. But the storm effects shouldn’t make us discount the broad signs of weakness on business spending side.

 

Housing remains the one bright spot on the economic horizon, which has the potential of offsetting the weakness from business spending and exports. This morning’s strong quarterly earnings report from Toll Brothers (TOL), the high-end homebuilder, further confirms the favorable momentum in this key sector of the economy. Results from close-out retailer Big Lots (BIG) also came in better than expected this morning.

 

But these two positive earnings reports shouldn’t distract us from the overall uncertain corporate earnings picture in the coming quarters. Current expectations for full-year 2013 remain on the optimistic side even without accounting for a reasonable ‘cliff’ resolution. This increases the odds that we will see accelerated downward adjustments to estimates in the New Year.

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