The economy has been showing signs of life lately — more jobs, a better housing market and a pickup in spending by consumers.
Will Washington put a stop to that? As business leaders, investors and economists shift their focus away from politics to fundamentals after President Obama’s re-election, fears are growing that more of the same gridlock in Washington over fiscal policy will slow the economy to a stall in the next few quarters, perhaps even tipping it into recession.
Those worries, as well as more gloom about Europe, conspired to send stocks sharply lower on Wednesday, with major market indexes falling by roughly 2 percent.
While many executives on Wall Street and in other industries supported the Republican presidential nominee, Mitt Romney, many had already factored in the likelihood of Mr. Obama, a Democrat, winning a second term.
But traders were still unnerved on Wednesday by the continuation of a divided government in Washington and little prospect for compromise.
Some economists warned that another downgrade of the country’s credit rating had grown more likely, and a major ratings agency warned that Mr. Obama would get no fiscal honeymoon.
“The bottom line is that this looks like a status quo election,” said Dean Maki, chief United States economist at Barclays.
“While we have clarity on the players now, we don’t have any more clarity on what will happen in terms of the fiscal cliff,” Mr. Maki said, referring to the package of tax increases and spending cuts set to go into effect early next year if Congress and the president can’t reach a deal to reduce the deficit.
“We still have a divided government, and they haven’t been able to agree on what to do.”
Going over the fiscal cliff outright would deal a $650 billion blow to the economy, Mr. Maki estimated, the equivalent of roughly 4 percent of the nation’s output.
He envisions a partial compromise, with $200 billion in tax increases and spending cuts. With that, he estimates the annual rate of economic growth will dip to 1.5 percent in the first quarter of 2013 from 2.5 percent in the fourth quarter.
Hitting the full fiscal cliff, he predicts, would lead to a contraction in the first half of next year. Business leaders on Wednesday acknowledged that relations with Mr. Obama in his first term were sometimes frosty, but reiterated their call for action.
“I don’t think there’s anything more urgent than dealing with our fiscal crisis,” said Jay Timmons, president and chief executive of the National Association of Manufacturers in a call with reporters.
“It’s already having an impact on our economy.”
Compounding the jitters in the markets, European officials released a report suggesting further deterioration there.
The European Union will have a weak recovery during 2013, while unemployment will remain at “very high” levels, according to a set of forecasts issued Wednesday by the European Commission.
This year, the gross domestic product will shrink by 0.3 percent for the 27 members of the union as a whole and by 0.4 percent for the 17 countries that use the euro, the commission predicted.
Growth in 2013 will be a meager 0.4 percent across the union and only 0.1 percent in the euro area, it said.
That growth, far slower than in the United States, makes it more difficult for debt-burdened European economies to get their financial houses in order.
Nor is the United States expected to come to the rescue. Mr. Obama may be popular in Europe, but there are doubts about whether he will push policies like a free-trade agreement similar to the Nafta arrangement that links Canada, Mexico and the United States.
Just a few hours after Mr. Obama’s victory speech in Chicago and Mr. Romney’s concession in Boston, Fitch Ratings warned there would be “no fiscal honeymoon for President Obama.”
While Fitch still has an AAA rating on United States government debt, it lowered its outlook to negative in November 2011, and said Wednesday that failure to avert the fiscal cliff and also raise the country’s debt ceiling “would likely trigger a rating downgrade” next year.
In 2011, a debt limit standoff pushed Standard & Poor’s to lower its credit rating for the United States to AA+ from AAA.
That move unsettled markets globally, though the government has been able to continue issuing debt at extremely low rates because of the desirability of Treasuries during turbulent times.
A downgrade of United States debt has become more likely, said Jeremy Lawson, senior United States economist with BNP Paribas.
“The U.S. isn’t being pressured by markets to do a deal,” he said. “That gives Washington the incentive to push it off.”
nytimes.com
Will Washington put a stop to that? As business leaders, investors and economists shift their focus away from politics to fundamentals after President Obama’s re-election, fears are growing that more of the same gridlock in Washington over fiscal policy will slow the economy to a stall in the next few quarters, perhaps even tipping it into recession.
Those worries, as well as more gloom about Europe, conspired to send stocks sharply lower on Wednesday, with major market indexes falling by roughly 2 percent.
While many executives on Wall Street and in other industries supported the Republican presidential nominee, Mitt Romney, many had already factored in the likelihood of Mr. Obama, a Democrat, winning a second term.
But traders were still unnerved on Wednesday by the continuation of a divided government in Washington and little prospect for compromise.
Some economists warned that another downgrade of the country’s credit rating had grown more likely, and a major ratings agency warned that Mr. Obama would get no fiscal honeymoon.
“The bottom line is that this looks like a status quo election,” said Dean Maki, chief United States economist at Barclays.
“While we have clarity on the players now, we don’t have any more clarity on what will happen in terms of the fiscal cliff,” Mr. Maki said, referring to the package of tax increases and spending cuts set to go into effect early next year if Congress and the president can’t reach a deal to reduce the deficit.
“We still have a divided government, and they haven’t been able to agree on what to do.”
Going over the fiscal cliff outright would deal a $650 billion blow to the economy, Mr. Maki estimated, the equivalent of roughly 4 percent of the nation’s output.
He envisions a partial compromise, with $200 billion in tax increases and spending cuts. With that, he estimates the annual rate of economic growth will dip to 1.5 percent in the first quarter of 2013 from 2.5 percent in the fourth quarter.
Hitting the full fiscal cliff, he predicts, would lead to a contraction in the first half of next year. Business leaders on Wednesday acknowledged that relations with Mr. Obama in his first term were sometimes frosty, but reiterated their call for action.
“I don’t think there’s anything more urgent than dealing with our fiscal crisis,” said Jay Timmons, president and chief executive of the National Association of Manufacturers in a call with reporters.
“It’s already having an impact on our economy.”
Compounding the jitters in the markets, European officials released a report suggesting further deterioration there.
The European Union will have a weak recovery during 2013, while unemployment will remain at “very high” levels, according to a set of forecasts issued Wednesday by the European Commission.
This year, the gross domestic product will shrink by 0.3 percent for the 27 members of the union as a whole and by 0.4 percent for the 17 countries that use the euro, the commission predicted.
Growth in 2013 will be a meager 0.4 percent across the union and only 0.1 percent in the euro area, it said.
That growth, far slower than in the United States, makes it more difficult for debt-burdened European economies to get their financial houses in order.
Nor is the United States expected to come to the rescue. Mr. Obama may be popular in Europe, but there are doubts about whether he will push policies like a free-trade agreement similar to the Nafta arrangement that links Canada, Mexico and the United States.
Just a few hours after Mr. Obama’s victory speech in Chicago and Mr. Romney’s concession in Boston, Fitch Ratings warned there would be “no fiscal honeymoon for President Obama.”
While Fitch still has an AAA rating on United States government debt, it lowered its outlook to negative in November 2011, and said Wednesday that failure to avert the fiscal cliff and also raise the country’s debt ceiling “would likely trigger a rating downgrade” next year.
In 2011, a debt limit standoff pushed Standard & Poor’s to lower its credit rating for the United States to AA+ from AAA.
That move unsettled markets globally, though the government has been able to continue issuing debt at extremely low rates because of the desirability of Treasuries during turbulent times.
A downgrade of United States debt has become more likely, said Jeremy Lawson, senior United States economist with BNP Paribas.
“The U.S. isn’t being pressured by markets to do a deal,” he said. “That gives Washington the incentive to push it off.”
nytimes.com
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