The Fiscal Cliff
There is a serious confluence of economic factors threatening to derail not only the U.S. recovery, but potentially the world economy as soon as January 1, 2013. On that date, known as the ‘Fiscal Cliff,’a series of tax cuts and other forms of tax relief are scheduled to expire, while at the same time across-the-board spending cuts totaling $1.2 trillion are set to begin. While potentially good news for the budget deficit, economists believe the resulting decrease in discretionary income would plunge the U.S. economy back into recession, with first-quarter GDP shrinking at an annualized rate estimated at 3.9%. To date, there is no consensus as to how to tackle this issue, and in fact many believe the best course of action is to allow it to happen.
Perhaps the first to fall would be the stock market, which has seen extraordinary gains thanks to the advent of quantitative easing. The dominoes after that could be equally devastating to the overall economy.
Labor Market: Long-Term Health
Over the long term, the labor market always recovers. The question is not if, but when. It is possible that the traditional economic definition of full employment (per the Humphries-Hawkins Act of 1978) of 96% has experienced a quantum shift due to technological efficiencies coupled with a permanent conservative position initiated by the Great Recession; the net impact of the shock to the labor force has yet to be seen. Although certainly good news, the shadow unemployment rate remains a threat to full employment occurring anytime soon, as does the impending “fiscal cliff.”
In an economy buffeted by over four years of mostly bad news, however, dramatic improvement in the unemployment rate (even as narrowly measured) is certainly welcome. It’s now up to the bickering politicians to keep things going. Don’t hold your breath.
United States Department of Labor, Bureau of Labor Statistics. Employment Situation Summary (2012). Accessed on October 8, 2012.
KTVU. U.S. unemployment below 8 pct, first time since 2009 (2012). Accessed on October 8, 2012.
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SoldAtTheTop. On the margins: Calculating the ‘total unemployment’ rate (2012). Christian Science Monitor. Accessed on October 8, 2012.
NIDataPlus. Historical Labor Force/Unemployment Data for UNITED STATES (2012). Accessed on October 8, 2012.