The so-called “fiscal cliff” isn’t technically supposed to hit until 2013, when a mixture of tax increases and spending cuts could potentially go into effect. However, participants in the U.S. economy seem to be of two minds about whether the fiscal cliff is going to happen, or is maybe already here. Businesses seem to be acting like the economy already has one foot in the abyss – we’ll call this the pessimistic case. American consumers, on the other hand, seem to be operating under the assumption that all the partisan issues will get fixed before we reach the edge – we’ll call this the optimistic case.
First, let’s look at businesses. Durable goods orders were way down in the most recent data print. A good chunk of this 13.2% decline was due to a drop in aircraft orders. Boeing only received a single order in August…that’s after getting hundreds of orders in July. Take away the transportation effect and you’re still looking at a drop of 1.6% for the month. August industrial production was down. The Chicago Fed’s National Activity Index was at a three-year low. Capital goods shipments fell in August, after a decline in July. So it’s probably no surprise that a survey of CEOs by the Business Roundtable about their near-term expectations for sales, capital spending, and hiring fell to a level not seen since late 2009.
Switch over to the consumer, and things seem a bit brighter. Housing data have been improving. Measures of consumer confidence have been on the rise. Real consumer demand stands at around 1.9% for the third quarter of the year…sure, that was financed by a drop in savings rather than an increase in incomes, but still, it proves that U.S. consumers are willing to spend some money.
So what do consumers see that businesses don’t? Or vice versa? It’s tempting to think that businesses should see consumer sentiment improving, and adjust their own forecasts accordingly…unless there wasn’t this specter of partisan-fueled fiscal brinksmanship looming over the whole picture. Once the U.S. elections take place, I expect we’ll start to see some progress on the fiscal-cliff issues, and hopefully business sentiment will improve with some clarity around the tax and regulatory policies that they can expect.
Where do you stand? Look down. Do you see solid ground or the gaping maw of recession? I go into more detail in this week’s economic commentary. You can find it here. Check it out and you’ll also find my thoughts on whether Paul Krugman is running (or his ideas, rather) U.S. monetary policy.