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In the Cliff's Shadow, a Recession May Be Taking Root


Concerns about the economy have been great enough that Obama requested $200 billion worth of stimulus funds as part of any agreement, a request that was met with withering criticism by GOP lawmakers intent on reducing the debt.

Even if these negative forecasts seem a bit far-fetched - and plenty of economists say they are - the overall picture still appears to be dour.

Macroeconomic Advisers predicts that GDP growth in the final three months of 2012 will be just 0.7%. Both Hurricane Sandy and a one-time decline in defense spending have subtracted from an economy that would otherwise be improving at a 2% to 2.5% clip. That's much better, but still dreary by most standards.

Wall Street royalty like Goldman Sachs CEO Lloyd Blankfein claim that fears of a fiscal disaster - a $500 billion-plus mix of automatic tax hikes and spending cuts slated for 2013 - have shackled the economy. The kind of bargain would cause the uncertainty to lift, as the engines of growth roared back to life, CEOs like Blankfein reason in public comments.

But the fundamentals examined by Macroeconomic Advisers say otherwise. The private consulting firm expects growth next year - even with an agreement - to be 2.5%. "GDP growth in the vicinity of 2.5% next year would imply there is not likely to be much sustained improvement in unemployment for at least a few more quarters," it said in its most recent weekly commentary.

The usual rule of thumb is that unemployment falls when GDP increases by more than 5%. Unemployment fell to its current level of 7.7% in part because frustrated workers exited the labor force.

But a deal on the fiscal cliff also poses a threat if it causes government spending to contract by too much and the private sector can't fill in the gap. The Jerome Levy Forecasting Center recently cautioned in a client note that a recession would ensue if the federal government tightened its deficit by $250 billion, which is less than half of the full fiscal cliff.

Based in New York, the center anticipates "another year of modest expansion." It's closely monitoring trade and one critical component of the economy: non-defense capital goods, which reflect how much confidence companies have in the economy through their orders of new machinery and computers. New orders for non-defense capital goods, excluding airplanes, have been flat so far this year.

Kevin Feltes, an economist with the forecaster, told The Fiscal Times: "It's looking about as bad as it ever does, outside of heading into a recession."
Editor's Note: This article by Josh Boak originally appeared on The Fiscal Times.

For more from The Fiscal Times:

Beyond BRICs: 2012's Top Global Investing Hot Spots

Cliff Talks: All Talk Could Still Lead to No Action

If Investors Are Dumping Stocks, Why Are ETFs So Hot?

Follow The Fiscal Times on Twitter @TheFiscalTimes.
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