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Looming “Fiscal Cliff” Continues to Fuel Economic Uncertainty

One month, the numbers tell us that economic conditions are softening, the next month we discover the economy is on the rise.  It almost sounds like a political debate where the views of reality are so different it is hard to tell what direction the economy is going.  The issue is not what an individual number may indicate but what is the trend over time.  While growth is hardly strong, it is holding up despite the problems created by Washington’s refusal to deal with the looming “fiscal cliff.”

As is usually the case, the employment report was the center of attention and boy did it deliver.  The unemployment rate gapped down in September to 7.8%.  This was the lowest rate since January 2009, the month Mr. Obama was inaugurated.  And that immediately raised the question: Was the number politically manipulated?  Very simply, the answer is no, no and once again, no. There was no conspiracy unless you believe the moon landing was faked or aliens crashed in Roswell, NM.  I know of no professional economist who thinks the data are politically biased.  They may not be what they think they should be, but not because there is political interference in the data creation process.

Actually, it is not that unusual for the unemployment rate to move by 0.3 percentage point in a month.  Over the last ten years, there has been a monthly change of that magnitude twelve times.  In other words, about once a year you should expect a large change in the unemployment rate.  The last time it happened was twenty months ago so maybe we were simply overdue.  For better or worse, the data are what the data are.

That said, the September report still contained something for both sides of the aisle.  It was great to see that the unemployment rate is continuing its fairly steady decline.  It has fallen by over one percentage point in the past year.  But on the other hand, job growth was disappointing.  The 116,000 increase indicated that businesses didn’t pad the payrolls a whole lot after hiring an average of 160,000 over the summer.

The slowdown in employment growth raises an interesting question: Was the softening in job gains a consequence of a weakening economy or the growing concerns about the “fiscal cliff”?  It is hard to square solid retail demand and rising vehicle sales, which were the highest in 4 1/2 years in September, with declining CEO confidence.  You would think that stronger household spending would get the business juices flowing.  The logical conclusion is that the fear that Washington will drive the economy off the cliff is holding back hiring.

The better job figures and improving consumer spending data don’t indicate that the economic rebound is about to accelerate sharply.  Housing may be improving but we have a long way to go before the sector is strong.  Banks are becoming healthier but they are not ready to open the credit spigot yet.  Europe remains in recession and Asia is slowing so exports could moderate further.  And gasoline prices are squeezing us again.  The hurdles are still there though some have been lowered.

So, where do we go from here?  With executives saying that hiring and investment will be kept under wraps until the election is over and the fiscal cliff is addressed, don’t look for a whole lot of progress before year’s end.  But once some solution to the looming tax increases and spending cuts is put in place, we could see much stronger payroll and corporate spending to meet the pent up demand.  That should make the first half of 2013 a lot better than the last part of 2012.

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Posted in Business Resources, Financial Education.

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