The Fiscal Cliff

You've probably heard this phrase a million times so far this year - and you are going to hear it a million more.  Prepare yourself for the buzz word of the back half of 2012: the fiscal cliff.

Okay, let's start with the basics - what is the fiscal cliff?  It's essentially two things:

1. The expiration of the "Bush Tax Cuts" - across the board.  This means that every tax bracket will see their taxes return to the pre-Bush era.  Essentially, it's a tax increase.  President Obama is calling for a one-year extension of the cuts for anyone making $250,000 or less, while Republicans are calling for an across the board extension.  
2. Sequestration.  As a result of the Super-Committee's failure to come to a consensus on spending cuts, $1.2 trillion in defense and discretionary spending cuts will be enacted over a ten year period.  Congress could, of course, revise the spending cuts, but we've all seen just how functional Congress is these days, so right now, that isn't likely.

Meanwhile, Congress needs to pass a spending authorization measure by September 30, or the federal government shuts down.  

Both of these things are good for the United States' long-term deficit reduction efforts, but bad for the economy right now, given its shaky state and the constant debt and austerity issues in Europe.  

So, what happens if we jump off the fiscal cliff?  According to the non-partisan Congressional Budget Office, if we do go off of the cliff, the US will enter a recession in the first half of 2013, with the GDP dropping 4% - but, if everything is extended a year, the economy will grow 4%.

Wow.

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What could blow up the fragile economic recovery?

Most agree that the economy is recovering, although very slowly, and the recent jobs report did little to increase confidence.  More to the point, any outside event could put the economy right back in the tank.  What do you need to keep an eye out for?  Here are a few events that could destroy whatever momentum remains in the current economic crisis:

• Europe:  The European debt crisis, though calmed, is not over.  Italy, Spain, Greece and Ireland have all faced significant debt-related challenges and are in various positions of austerity and assistance; however, significant issues remain and concern remains of any European country pulling out of the Euro. If that happens, or if the debt crisis fires up again, there will be ramifications in the United States.
• Gas prices:  Gas prices are certainly tied to outside world events; the good news, however, is that they have decreased recently, falling an average of $.07 this week.  If this trend continues, gas will obviously not be hurting the economy.  The problem, however, lies in the potential unrest in Syria or Iran.  If an outside conflict begins in either of those countries, gas prices will increase; some even believe that it could reach as high as $7 a gallon.
• China and India:  Recent information shows that the economy in both China and India is slowing; this will obviously hurt US exports and the rest of the world economy.  The ripple effects of such a slowdown would absolutely be felt in every corner of the U.S.

These are the three biggest (foreseeable) threats to the U.S. economy; that being said, some unforeseen event (such as a terrorist attack or global pandemic) could always rear its ugly head.  Of course, there isn't a whole lot the average small business can do to prepare for such a crisis, so let's concentrate on what can be predicted.  What do you think?  Are you concerned about any of the above?  Let us known in the comments!

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Economic slowdown?

I caught this story on CNN and it seemed worth elaborating on.  The story notes that two Federal Reserve Presidents are concerned that the recovery, already slow, may be slowing further.  The primary indicator of this is that GDP only grew 2.2% in the 1st quarter of 2012, compared to 3% in the last quarter of 2011.  The two men also noted that there are at least two potentially significant worries that the economy faces down the road: ongoing European debt issues and rising gas prices.  Both have cooled, at least for now, but could flare up again and damage our economic recovery.

There are also initial concerns that the job market is slowing as well.  For the second straight month, private job  growth dipped.  In April, the private sector only added 119,000 jobs, compared to 201 jobs in March and 228 jobs in February.  The same happened in the Valley, with a recent jobs report noting that the area lost 3,200 jobs - despite unemployment dropping to 7.9% from 8.1%.  The big report is expected this Friday, however, when the April unemployment numbers are expected to be released.

All indicators are preliminary, but its enough to get people worried.  What do you think?  Are you worried about the economy slowing down again, and is it something that you have noticed?  Let us know in the comments!
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What could blow up the economy in 2012

As we previously blogged about, we held our Economic Outlook event last week.  The event reviewed likely global, national and local economic trends and was extremely informative for anyone who has an interest in how the economy turns out in 2012.

The consensus of the event was continued, if gradual, economic recovery in just about every sector, even the labor market.  However, according to Dr. Jay Bryson of Wells Fargo, three items have the potential to destroy the economic in 2012.  We wanted to review what those three possibilities are:

• Increasing geo-political tensions: The entire world is a hotspot, but political and military actions have the potential to seriously hinder economic recovery.  Iran, for example, has been threatening to block off the Straits of Hormuz, and US officials have not ruled out military action to keep the Straits open.  If the Straits are blocked, however, that could drive oil up to $150 a barrel - which would be a $50 increase from where it is today.  That is not something our economy could absorb.  
• Possible shut-down of federal bond market:  Our debt has, without question, grown sustainability over the past few years, and the time may come where investors refuse to by U.S. bonds.  However, according to Dr. Bryson, this remains unlikely in the immediate future, as the U.S. continues to be viewed as a solid investment.  This issue must be addressed in the long-term, however.
• Europe debt crisis:  The European debt crisis "blowing up" is the item here that is most likely.  There are numerous European countries in which debt default is some level of possibility.  Greece is the country most likely to default, but other countries have that risk as well, including Spain and Italy.  Italy could cause the biggest problem - if it were to default, that's $3 trillion in debt down the tubes.  The U.S. itself does not hold a huge portion of the debt of any of these countries - but many of our trading partners do - and if these countries go down, the domino effect could hurt the U.S. as well.

So, what do you think?  Any threats that we missed?  Let us know in the comments!

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