The term ‘fiscal cliff’ has now safely transitioned from economic jargon to popular cliché. But how worried should Americans be about the growth-stunting mélange of expiring tax cuts and spending reductions set to begin kicking in at the start of next year?
Economists widely believe that if Congress fails to come to some sort of agreement on the budget, the U.S. economy would plunge into a deep recession. RBS economist Michelle Girard, however, thinks a recent pick up in U.S. economic activity could offset some of the cliff-related weakness.
While uncertainty over the fiscal cliff dominates most conversations, the relative strength of the underlying U.S. economy should not be forgotten. The expansion is today on firmer footing today than at any point in the past three to four years. No major economic imbalance exists. Moreover, headwinds that have hindered the pace of recovery are fading.
The bottom line is that the US economy may be better positioned to withstand greater fiscal drag than many currently believe. While going over the so-called fiscal cliff (in its entirety) would almost certainly lead to a sharp contraction in economic activity in early 2013, the improving economic base we now observe leads us to conclude that such a downturn would likely be short-lived.
The latest sign of strength came from a report showing housing starts surged 15 percent to their strongest levels in more than four years, adding to optimism following September’s drop in the jobless rate to 7.8 percent.
