"Fiscal cliff" drag on economy less than feared so far

WASHINGTON Fri Dec 21, 2012 12:47pm EST

Women carry shopping bags through Times Square in New York, July 27, 2012. REUTERS/Andrew Burton

Women carry shopping bags through Times Square in New York, July 27, 2012.

Credit: Reuters/Andrew Burton

WASHINGTON (Reuters) - The U.S. economy showed surprising signs of resilience in November despite the approach of the so-called fiscal cliff as consumer spending rose by the most in three years and a gauge of business investment jumped.

Consumer spending rose 0.6 percent when adjusted for inflation, while new factory orders for capital goods outside the defense and aerospace sectors - a proxy for business spending plans - jumped 2.7 percent, the Commerce Department said on Friday.

Economists had pinned earlier weakness in investment plans on worries lawmakers and the White House might fail to strike a deal to avoid the brunt of tax hikes and government spending cuts scheduled to begin in January.

They also worried consumers would hold back as the end-of-the-year deadline approached with both parties far apart on how to avoid the potential hit to the economy. But Friday's data suggested both consumers and businesses had mostly shrugged off the cliff, at least in November.

"It appears that the looming fiscal cliff hasn't been nearly as disruptive as we had feared," said Paul Ashworth, an economist at Capital Economics in Toronto.

Still, another report provided ample reason for caution as U.S. consumer sentiment slumped in December, with households apparently rattled by on-going negotiations to lessen the fiscal tightening that could easily trigger a recession next year.

The Thomson Reuters/University of Michigan's final index of consumer sentiment in December tumbled more than expected to 72.9 from 82.7 a month before.

U.S. stocks fell sharply after a Republican proposal for averting the fiscal cliff was abandoned late on Thursday, eroding optimism that a deal could be reached quickly. At the same time, U.S. government debt prices rallied and the dollar gained ground as investors sought a safe haven.

Economists still expect economic growth to cool in the fourth quarter as companies slow the pace at which they have been re-stocking their shelves, but the data on Friday suggested consumers are offsetting some of that drag.

Consumer spending is on track to grow at a 2.2 percent annual rate in the fourth quarter, faster than during the prior three months, said Michael Feroli, an economist at JPMorgan in New York.

Forecasting firm Macroeconomic Advisers raised its forecast for fourth-quarter economic growth by four tenths of a point to a 1.4 percent annual rate. In the third quarter, the economy expanded at a 3.1 percent rate.

"The economy is holding in here at the end of the year despite the concerns about the fiscal cliff," said Gary Thayer, an economic strategist at Wells Fargo Advisors in St. Louis.

WORRIES AHEAD

Those concerns are not going away.

In November, many analysts on Wall Street said they expected Washington would largely avert the fiscal cliff, and optimism had grown over the last week that a deal was within reach. Since Wednesday, however, negotiations have fallen into disarray.

If Congress and the White House do not reach a deal in time, taxes will go up for all Americans beginning in January and the government will cut spending on a host of programs. Running off the fiscal cliff would slash the nation's trillion-dollar budget deficit nearly in half in just one year.

The impact would only come gradually, but economists expect it would be enough to knock the country into recession in the first half of the year.

So far, uncertainty over the talks appears to have had only a limited impact on the economy.

New orders for durable goods, items meant to last three years or more, rose a greater-than-expected 0.7 percent in November due to gains in machinery, fabricated metal products, and computer and electronic products. Those increases were offset by a decline in volatile aircraft orders.

The report also showed a rise in shipments, brightening the prospects for fourth-quarter economic growth.

Shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the government's measures of gross domestic product, gained 1.8 percent, after rising by a softer 0.6 percent in October.

(Additional reporting by Ellen Freilich and Leah Schnurr in New York; Editing by Andrea Ricci and Tim Ahmann)

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Comments (3)
todnwth wrote:
How does Boehner and the republicans think they can force Obama and the democrats to accept a deal that does not raise taxes on the rich.
They will rise automatically on January 1. 2013 if they reach a deal or not.
Obama has upped his original rise to 400 thousand which I think should have been lowered to 150 thousand instead.
Those making even a 100 thousand have come out like bandits these last ten years while the man and wife without children or single person got a 300 hundred dollar cut in their taxes.

Dec 21, 2012 10:51am EST  --  Report as abuse
stevedebi wrote:
Representative Boehner represents the will of the American people, as indicated by the fact that the GOP was re-elected to control of the House of Representatives. That is the basis for his standing firm on slashing spending. The “offers” put forth by the President all include increased spending! That is hardly the way to get out of a hole – to keep digging.

People never seem to remember that the entire reason the tax cuts expire is that the Democrats blocked it in the Senate, so the Republicans had to pass it with “reconciliation”, which automatically expired after a number of years. If not for the Democrats, those cuts would have been permanent.

Dec 21, 2012 2:19pm EST  --  Report as abuse
stevedebi wrote:
Representative Boehner represents the will of the American people, as indicated by the fact that the GOP was re-elected to control of the House of Representatives. That is the basis for his standing firm on slashing spending. The “offers” put forth by the President all include increased spending! That is hardly the way to get out of a hole – to keep digging.

People never seem to remember that the entire reason the tax cuts expire is that the Democrats blocked it in the Senate, so the Republicans had to pass it with “reconciliation”, which automatically expired after a number of years. If not for the Democrats, those cuts would have been permanent.

Dec 21, 2012 2:19pm EST  --  Report as abuse
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