Post elections, financial markets are on the watch for a resolution of fiscal cliff. Early remarks from leaders on both sides suggest a conciliatory tone and a willingness to negotiate in order to prevent a large reduction in government spending and a significant tax hike. The pressure they face is substantial, as nervous post-election trading suggests high anxiety on the part of investors. Our pre-election comment of November 1 outlines the issues that are at stake.
Our expectation remains that the worst case will not come to pass, and that the cliff will be softened to a slope sometime in the next six to eight weeks. Still, it is unlikely that all of the spending cuts and tax increases will be reversed, and weve reflected that in a forecast for a somewhat softer first quarter of 2013.
We have tweaked our forecast of fourth quarter GDP to account for Sandy and to reverse some non-recurring increases seen in the third quarter. As a result of these changes, we expect fourth quarter real GDP to advance at a 1.5% annual pace, representing a slowing from the third quarter.
US Economic Outlook
Key elements of the current forecast include:
Economic developments in Europe and China will have an important bearing on the growth path of the US economy. We continue to assume orderly resolutions of present challenges in both markets, but the risk of disorder remains.