The Economy

Fiscal Cliff Nears, as Does Possible Recession

An economist tells CFOs that year-end political intransigence threatens to reverse the modest recovery of the U.S. economy.
Vincent RyanOctober 30, 2012

MIAMI — When the new year dawns, the giant sucking sound emanating from the United States will be the $1 trillion draining from the U.S. economy as a result of federal government spending cuts and tax increases. Although that’s currently a bad dream for CFOs, Congress’s inaction as the “fiscal cliff” nears threatens to turn it into reality.

Expiration of the Bush tax cuts, the end of extended unemployment benefits, a rise in payroll taxes, and reductions in spending on discretionary government programs would combine to throw the country back into recession, according to Donald Ratajczak, an economist and professor emeritus at Georgia State University.

“If Congress fails to act, we will [certainly] have a recession next year; I’m not saying ‘might,’” said Ratajczak, addressing finance chiefs at the CFO Playbook Conference Tuesday. The lame-duck Congress will likely postpone the day of reckoning, and a new Congress will address the key issues related to the tax code and the federal deficit, he said.

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But the lack of urgency about the situation in Washington is irritating CFOs. “No matter who is elected, I am concerned it’s a political play,” said Rich Koslowski, CFO of privately held BullsEye Telecom, who was attending the conference. “Who suffers from that? The people in the economy do. I wish [Washington] would just get on with it.”

A recession would hurt BullsEye Telecom’s biggest customer bases — retail companies and restaurants that buy the company’s telecommunication and data services — as it did five years ago.

Executives are taking the threat seriously. Companies are earning high returns from their existing assets and maintaining robust profit margins, which usually motivates companies to buy new assets, Ratajczak said.

But not in this economy. The problem causing lack of investment is lack of clarity on the tax code and whether Washington will go through with aggressive spending cuts. That’s “uncertainty [businesses] can’t deal with,” he said.

How do CFOs forecast an economic situation that depends on the outcome of political wrangling in Washington? They don’t. “You remain conservative as to what your growth prospects will be,” said Koslowski. “Until you’re out of the woods, you keep a lot of cash on the balance sheet and sit and wait to see what happens.”

Consumers, on the other hand, “have decided not to worry anymore,” said Ratajczak, in part because they’re becoming numb to the country’s economic woes. “It’s like walking through a cemetery at midnight: the first time you have sweaty palms, but by the 10th time you walk by and don’t even notice it,” he said.

But there are bona fide reasons to be optimistic about the U.S. economy, said Ratajczak. For example, the upturn in housing prices looks to be real. “We are not building as many houses as creating new households, so the anticipation is we will clear excess housing inventory,” spurring higher home prices, he said. “You might start to see banks lend on the equity value of homes again.”

But growth will be slow and maybe sporadic. While the United States’s gross domestic product grew 2% last quarter, the country is almost a year away from surpassing that number, says Ratajczak.

The defense department moved up its spending in the third quarter, in anticipation of sequestration cuts next year, adding 0.6% to GDP last quarter, explained Ratajczak. But pulling forward those outlays means the first half of 2013 will see only 1.5% annualized GDP growth. In the second half, U.S. GDP growth could rise to 3%, but that’s assuming the fiscal cliff gets resolved. It’s a big “if.”

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