December 3, 2012 / 9:36 PM / 7 years ago

'Fiscal cliff' worries? Could be worse, index shows

NEW YORK, Dec 3 (Reuters) - An index that measures levels of uncertainty weighing on the U.S. economy rose in November but remained well below its record high, despite the political standoff over the so-called fiscal cliff.

The Economic Policy Uncertainty Monthly Index, which is calculated by academics at Stanford University and the Chicago Booth School of Business, rose to 196 points in November, up from 172 in October.

The outcome of November’s elections, which left the Democrats in charge of the White House and Senate, with the Republicans in control of the House of Representatives, helped push the index up.

The level of uncertainty remained far below its highest reading of 244 points, reached in August 2011. That was when a partisan dispute in Congress over the U.S. debt ceiling raised the prospect of a debt default by the U.S. government.

“I would certainly expect our index would shoot up if negotiations (over the fiscal cliff) go really down to the wire,” said Scott Baker, a PhD candidate at Stanford University who is responsible for calculating the index.

A series of tax hikes and spending cuts are due to come into effect from Jan. 1 unless lawmakers in Washington can find an agreement on how to avert them. The uncertainty caused by the partisan standoff has been linked to a drop in investment and slow hiring by U.S. firms.

First devised by an academic study, the Economic Policy Uncertainty Monthly index takes a three-pronged approach to measuring uncertainty: it scans 10 major newspapers for the frequency of words related to the economy and policy uncertainty; it considers taxes which are due to expire and which can cause doubts about possible replacement measures; and it measures the degree of disagreement about the economic outlook among professional forecasters.

Baker said the positive impact on the economy of any deal to avert the fiscal cliff could be much larger than the drag caused by the lack of agreement.

“Markets and consumers are kind of used to uncertainty and expecting more of it,” Baker said, “so a surprising compromise and a willingness to compromise over the next few years over different issues can have a positive impact on GDP growth and employment.”

A return to lower levels of uncertainty seen in 2006 could add between one to two percentage points to the growth of GDP, he said. A further increase of uncertainty of around 50 points in the index could detract between half and a full percentage point, he added.

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