The Congressional Budget Office said Wednesday that the U.S. economy could slip back into recession if Congress fails to act before a total $8 trillion worth of tax increases and spending cuts are due to take effect in January — the so-called fiscal cliff. The same day the Fed signaled it was prepared to act fairly soon if growth doesn't pick up substantially and on a sustainable basis.
The aforementioned are two very big ifs, but Mark Zandi, chief economist at Moody's Analytics, has a rather optimistic outlook.
"It feels like political stars are now aligning so that regardless of who wins the next election, under almost any scenario they will get it together," he tells The Daily Ticker's Aaron Task. "Odds are good they will come up with a plan that addresses the fiscal cliff, the Treasury debt ceiling — which expires early next year — and fiscal sustainability."
Zandi attributes his rosy sentiment to deleveraging throughout the economy.
"The banking system is on much more solid ground, households have done a very good job of reducing their debt and most importantly American businesses are in very good financial shape," he says. "They've reduced their debt, got their balance sheets in order and are very profitable."
In the meantime Zandi says businesses want to see more progress dealing with Europe's financial crisis and U.S. fiscal issues before increasing investments and adding jobs. He expects the Eurozone to survive intact and the turmoil to abate slowly but surely. "With each bout of turmoil (the Europeans) are erecting an edifice for a stronger, more durable fiscal union," he says.
In the U.S., Zandi says, "It's important the next congress and president lay down a credible path toward fiscal sustainability with tax cuts and spending cuts over the next decade that stabilize the GDP to debt ratio."
Zandi was an unpaid economic advisor to John McCain during his 2008 presidential campaign and since then has occasionally advised President Obama on an informal basis.
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