Bernanke: US is facing "fiscal cliff"
Fears about a looming fiscal crisis at the end of the year are starting to pinch job growth and threatening to undercut the nation鈥檚 fragile recovery, a growing number of economists and employers say.
Federal Reserve Chairman Ben S. Bernanke, in testimony Thursday before Congress, repeatedly warned about the so-called fiscal cliff 鈥� a reference to the expiration of tax cuts Dec. 31 and the imposition of automatic spending reductions Jan. 1.
By some accounts, the U.S. economy could see an unprecedented fiscal hit of as much as $720 billion if the slated changes take effect.
搁贰颁翱惭惭贰狈顿贰顿:听Could 'fiscal cliff' push US into recession? Five questions answered.
They would include an end to the temporary tax cuts enacted during the George W. Bush administration and to temporary Obama administration payroll tax reductions. Spending cuts in defense and on federal programs were negotiated as part of last summer鈥檚 pact to raise the debt ceiling.
If all the changes take place, the shock will probably cause the economy to contract and possibly lead to a recession, Bernanke said.
So far, however, Bernanke鈥檚 concerns about the fiscal cliff have been largely obscured by the more immediate, intensifying financial troubles in Europe and elsewhere.
On Thursday, China cut its interest rates, sparking worries that the sprawling economy might be doing worse than thought. There also is a widespread expectation that Congress will take last-minute action to pull back from the fiscal cliff.
Some analysts are skeptical that lawmakers can come together to avoid potential disaster.
鈥淎s the cliff approaches, we expect first firms and then households to start postponing decisions, weakening the economy in advance of the cliff,鈥� economists at Bank of America said in a report this week. 鈥淲hen you are approaching a cliff, in a deep fog of uncertainty, you slow down.鈥�
That鈥檚 exactly what some employers are doing.
鈥淲e were in a growth mode for the first half of 2012,鈥� said Joe Dutra, president of Kimmie Candy Co. in Reno.
His company recently invested in factory equipment with plans to double production and add five to six workers to the payroll of 23. But he and other company managers met this week and decided to put everything on hold, even the installation of the new equipment.
鈥淢y main concern for our company is the uncertainty,鈥� said Dutra, 59, a one-time farmer in Sacramento who started Kimmie Candy as a side business in 2000. Since then, some of his chocolate products have become national brands.
鈥淲e look at the news every day, and it鈥檚 just a roller coaster,鈥� he said. 鈥淭he government is not stable. We have a government that can鈥檛 make hard decisions.... We鈥檙e looking at the future and expecting to be going back into more of a recession in 2013.鈥�
Bernanke wasn鈥檛 nearly as pessimistic; he told lawmakers Thursday that the economy was continuing to grow at a 鈥渕oderate鈥� pace. But he also expressed concerns about the deepening troubles in Europe, a slowdown in China and other developing countries, and the cloudy U.S. fiscal outlook.
Despite those risks and the weakening U.S. job market, the聽Fed聽chairman gave no clear signal that the central bank was about to provide more monetary stimulus to prop up the economy and bring down the unemployment rate, which inched up to 8.2% in May.
He said the fall-off in job growth 鈥� to 75,000 in the last two months, on average, from 225,000 a month in the first three months of the year 鈥� may have been exaggerated by issues related to the warm winter and by the end of what he called a spurt of 鈥渃atch-up hiring鈥� by employers who had cut payrolls aggressively during and just after the recession.
Still, Bernanke called on lawmakers to do more, 鈥渢o take some of this burden from us,鈥� reminding them of what happened last year when the debt ceiling debacle took the country to the brink of default.
鈥淭he brinkmanship last summer over the debt limit had very significant adverse effects for financial markets and for our economy.... It really knocked down consumer confidence quite noticeably,鈥� Bernanke said. 鈥淚 urge Congress to come to agreement on that well in advance so as not to push us to the 12th hour.鈥�
Many, however, are expecting exactly that to happen again, especially in an election year. The stakes are higher this time as several large pieces of temporary legislation are set to end at once, the biggest of which is the Bush tax cuts, estimated at $165 billion.
Democrats and Republicans in Congress remain bitterly divided on those cuts, with President Barack Obama determined to eliminate the breaks for high-income Americans and GOP challenger Mitt Romney insisting that all the provisions should be made permanent.
In addition to the Bush-era tax cuts, Congress is likely to let expire both the payroll tax cut, which is saving the typical worker about $1,000 this year, and the federal extended unemployment benefits, though these provisions, too, could spark a fight, as they have in the past, analysts said.
鈥淭his is a problem we need to deal with, but unfortunately we鈥檙e not going to take this on until after the election,鈥� said Rep. Daniel Lipinski, D-Ill., referring to the fiscal cliff. 鈥淢y belief is that after the election, we鈥檒l sit here and the leaders will say on Dec. 24, 鈥榃e鈥檝e reached no conclusion, and we鈥檙e going to extend everything for two to three months until the new Congress comes in.鈥欌��
But moving the cliff out a few months or even longer carries risks. For one thing, economists said, it could trigger a credit downgrade. It also would be likely to increase the uncertainty and prompt more companies to adopt contingency plans.
If Congress can鈥檛 compromise on a new budget, automatic cuts will take effect under the so-called sequester outlined in the Budget Control Act. For defense, the 10 percent elimination would shave about $53 billion from the budget, to $472 billion.
鈥淧eople in the industry are really worried a train wreck could come.... They are starting to hedge,鈥� said Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments.
The impact of the uncertainty, he said, will be magnified at thousands of smaller second- and third-tier contractors, some of which are already asking, 鈥淗ow can you best position a business to prepare for this shock?鈥�
John Raine is one of them. His Anderson, Ind., company has been making military field gear, among other products, for 27 years. The U.S. withdrawal from Iraq and the drawdown in Afghanistan have already cost him significant business, forcing him to lay off a worker for the first time ever.
With potential defense cutbacks coming sooner or later, and higher taxes on the horizon, Raine said there was only one thing he could do.
鈥淵ou鈥檙e going to tighten down the hatches,鈥� he said. 鈥淚t鈥檚 the psychology.鈥�
搁贰颁翱惭惭贰狈顿贰顿:听Could 'fiscal cliff' push US into recession? Five questions answered.
