Fiscal Cliff May Rattle Economy Before Deadline Arrives Amid Election-Year Gridlock

At IBD, "Fiscal Cliff May Rattle Economy Even Before Deadline":

Regardless of how the year-end "fiscal cliff" of tax hikes and spending cuts is resolved, uncertainty over what lawmakers will do could weaken the economy before the deadline if businesses delay investment and hiring.

Add to that the Supreme Court's ObamaCare ruling and the possibility the debt ceiling will need another lift before the November elections, and the outlook gets even hazier.

Warnings about the fiscal cliff have largely centered on what would happen if all the Bush and payroll tax cuts expire, automatic budget cuts go into effect and ObamaCare tax hikes kick in. Estimates on the hit to 2013 GDP are 4%-5%.

But concerns are turning to the potential harm the uncertainty could inflict this year, especially during an election season.

"It's starting to definitely creep up on the radar," said Michael Hanson, senior economist at Bank of America Merrill Lynch.

Atlanta Fed President Dennis Lockhart recently warned of a "financial shock" if markets don't see enough progress on the fiscal cliff.

In a quarterly conference call on May 2, Boston Properties (BXP) noted problems closing deals with the federal government in the Washington, D.C., area.

"The fiscal cliff that we're all looking at is clearly creating an environment where the procurement process is really, really slow," said Douglas Linde, president and chief financial officer.

But manufacturers aren't voicing any concerns about the coming fiscal cliff, said Bradley Holcomb, chair of ISM's Manufacturing Business Survey Committee. Even worries over the European debt crisis have ebbed.

He attributed their confidence to the nearly three years of uninterrupted manufacturing growth and healthy order books. He sees lawmakers eventually resolving fiscal policy disputes, despite what news headlines might say.

"It's a nonissue at this point," he said. "It's like Europe. It's going to get resolved somehow."

Even if questions about future fiscal policy aren't hitting businesses yet, negative effects will become more real in the second half of the year, Hanson predicts.

Democrats and Republicans will dig deeper into opposing positions on which he doesn't see them compromising soon after the election. Short-term extensions or retroactive changes in early 2013 wouldn't lift today's cloudiness either, he adds.

"People are going to board up the house before the hurricane comes, not after," Hanson said.

See also the New York Times, "Republicans Pledge New Standoff on Debt Limit."

Plus, from the House GOP Conference, "FULL TEXT: Speaker Boehner's Address on the Economy, Debt Limit, and American Jobs" (via Memeorandum).