With Five Months To Go, Here Is "Cliff" Versus Consensus
America is now exactly 5 months away from the day the US Fiscal cliff will crater the economy unless a Congress which has never been as partisan as it is currently agrees to collaborate and delay the day of reckoning. This is very unlikely to happen before the presidential elections for obvious reasons, and it is even more unlikely to happen after the elections when politicians demonstrate just why the term "graceful loser" has never existed when describing what happens in D.C. So what would happen to the US economy if and when January 1, 2013 rolls in and nothing has changed, and how does this differ from the consensus? The chart below from BofA answers that particular question, and brings up a new one: even if the Fed goes ahead with more NEW QE today or in September, if the "cliff" consensus really is as wrong as it very well may be, will the Fed have no choice but to follow up its easing at this FOMC meeting or the next with another one immediately following? And is this precisely the one consideration for Ben Bernanke, who realizes very well that if financial conditions, read the Russell 2000, are relaxed just in time for the crucial decision on Bush Tax Cut extension, then absolutely nothing will happen, forcing the Fed to continue being the sole source of "stimulus" in America. Of course, in that case expect nothing from the Fed not only in in August and September, but well into 2013.
Consensus versus cliff: With the economy weakening even faster than our baseline forecast, it is worth considering downside risk scenarios. In our latest US economic weekly we consider a “severe cliff scenario” where the combined uncertainty shock and austerity shock lowers growth to zero by the fourth quarter. This would be well below the consensus that assumes gradual recovery in growth. The nearby chart shows our “severe cliff scenario” versus current consensus estimates.
A canyon sized gap: As we have argued before, the cliff impacts some parts of the economy more than others. The uncertainty shock has the biggest impact on hard-to-reverse big ticket spending items. We also believe the corporate sector is both quicker to recognize and more likely to respond aggressively to the cliff than the household sector. Hence we would expect the shock to show up first in capital spending and hiring and later in household purchases of homes and autos. The nearby table compares the severe cliff scenario to the consensus for some key economic indicators in the second half of this year. Note the big difference for business investment and light vehicle sales.
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