From the NCM Institute Blog: Are we likely to drive over the Fiscal Cliff? by Fred O'Dwyer

Even if your party did not win the White House a few weeks ago, you are still relieved, I would guess, that the election is finally over. Whether you are pleased or disappointed with the results, it is time to move on. After all, in about 30 days our country will be stepping right up to the edge of the fiscal cliff, ready to fall off into an economic nightmare in 2013. And that will surely happen, economists tell us, unless these politicians--many of whom we just (re)elected–-can reach substantial compromise on many key issues.

One pertinent question we must ask ourselves is “Do we really care about this fiscal cliff?” I would submit that we do care. We care because in the midst of all the pessimistic news, there are some real plusses in our economy that we need to keep and improve on. What are some of the plusses?

  • Auto sales, while not exactly robust, are one of the stronger segments of the economy;
  • Housing seems to have made a turnaround at long last;
  • Confidence among U.S. consumers climbed to a five-year high earlier this month;
  • There is a ton of cash on corporate balance sheets that can be deployed to productive investments, and will be, as corporate confidence improves;
  • The S&P 500, in spite of spinning downwards over six percent the last four weeks due in large part to fiscal cliff worries, is still up over ten percent year to date;
  • Even though it is discouraging that we have so far to go to get unemployment back to pre-recession levels, don’t forget that in October of 2011 the unemployment level was 8.9%.  One year later it stands at 7.9%. 

OK, what is the fiscal cliff, then?  It is a combination of expiring tax breaks and required budget cuts that together will cut more than 5% out of GDP in 2013. And when you remember that GDP is growing about 2% this year, taking out 5% will put us almost automatically into a recession. This list of fiscal cliff items is long. Here are the main ones:

  • Expiration of the Bush tax cuts that were put into place in 2001 and 2003, and extended in 2010;
  • Expiration of the AMT patch, which will have the effect of applying this tax to millions more citizens;
  • Expiration of the payroll tax cut of 2% in employee payroll taxes;
  • Expiration of federal unemployment benefits;
  •  Some provisions of Obama health-care legislation, including increased tax rates on high-income earners, are set to take effect in January, 2013;
  • The “sequester” or required spending cuts in defense and non-defense spending are scheduled to begin in 2013;
  • Without a Medicare “Doc Fix” the rates at which Medicare pays physicians will decrease nearly 30%.

What is the most likely scenario? Although certainly debatable, I agree with those who remind us that since neither party wants the fiscal cliff to happen, it most likely will not happen. According to Peter Mallouk, a successful entrepreneur and Certified Financial Planner,

In typical Congressional fashion, we expect a late fourth quarter resolution that will upset a bunch of people but avert disaster. Taxes will go up, health care taxes will go into effect and spending cuts may happen, but likely not at the pace set forth by the current plan. We also expect Nike to continue selling shoes, Apple to continue selling iPhones and iPads, Campbell’s to keep selling soup, and McDonald’s to keep selling cheeseburgers.1

And, let me hasten to add, we will continue selling cars and trucks. 

We’ve done our job. We elected them. Now it’s their turn to do theirs. 

1”The Fiscal Cliff” Newsletter," Creative Planning, September 11th, 2012, http://www.thinkingbeyond.com.

Fred O'Dwyer is the Chief Financial Officer for NCM Associates. Fred also occasionally teaches Principles of Financial Management classes for the NCM Institute.

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